PRUDENTIAL GOVERNMENT SECURITIES TRUST, 497, 1995-06-27

PRUDENTIAL GOVERNMENT SECURITIES TRUST
497, 1995-06-27

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<PAGE> 1

PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292

---------------------------

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

---------------------------

To our Shareholders:

Notice is hereby given that a Special Meeting of Shareholders of Prudential
Adjustable Rate Securities Fund, Inc. (Adjustable Rate Fund) will be held at
3:00 P.M. on August 15, 1995, at 199 Water Street, New York, N.Y. 10292, for the
following purposes:

1. To approve an Agreement and Plan of Reorganization and Liquidation
whereby all of the assets of Adjustable Rate Fund will be transferred to
Prudential Government Securities Trust -- Intermediate Term Series
(Intermediate Series) in exchange for shares of Intermediate Series, and
Intermediate Series will assume all of the liabilities, if any, of
Adjustable Rate Fund.

2. To consider and act upon any other business as may properly come
before the Meeting or any adjournment thereof.

Only shares of common stock of Adjustable Rate Fund of record at the close
of business on May 26, 1995, are entitled to notice of and to vote at this
Meeting or any adjournment thereof.

S. JANE ROSE,
Secretary

Dated: June 26, 1995

WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE SIGN AND PROMPTLY RETURN
THE ENCLOSED PROXY IN THE ENCLOSED SELF-ADDRESSED ENVELOPE. IN ORDER TO AVOID
THE ADDITIONAL EXPENSE OF FURTHER SOLICITATION, WE ASK YOUR COOPERATION IN
MAILING IN YOUR PROXY PROMPTLY.
<PAGE> 2

PRUDENTIAL GOVERNMENT SECURITIES TRUST
(INTERMEDIATE TERM SERIES)
PROSPECTUS
AND
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
PROXY STATEMENT

ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(800) 225-1852
------------------

Prudential Adjustable Rate Securities Fund, Inc. (Adjustable Rate Fund) has
registered as an open-end, diversified management investment company. Prudential
Government Securities Trust -- Intermediate Term Series (Intermediate Series) is
a series of Prudential Government Securities Trust, which has registered as an
open-end, diversified management investment company. Both Adjustable Rate Fund
and Intermediate Series (collectively, the Funds) are managed by Prudential
Mutual Fund Management, Inc. (PMF or the Manager) and have the same office
address. The investment objective of Adjustable Rate Fund is high current income
consistent with low volatility of principal. The investment objective of
Intermediate Series is to achieve a high level of income consistent with
providing reasonable safety.

This Prospectus and Proxy Statement is being furnished to shareholders of
Adjustable Rate Fund in connection with a proposed Agreement and Plan of
Reorganization and Liquidation (the Plan), whereby Intermediate Series will
acquire all of the assets of Adjustable Rate Fund and assume the liabilities, if
any, of Adjustable Rate Fund. If the Plan is approved by Adjustable Rate Fund's
shareholders, all such shareholders will be issued shares of Intermediate Series
in place of the shares of Adjustable Rate Fund held by them, and Adjustable Rate
Fund will be liquidated. Shareholders of Intermediate Series are not being asked
to vote on the Plan.

This Prospectus and Proxy Statement sets forth concisely information about
Intermediate Series that prospective investors should know before investing.
This Prospectus and Proxy Statement is accompanied by the Prospectus of
Intermediate Series, dated April 3, 1995, including a May 12, 1995 Supplement
thereto, and the Prospectus of Adjustable Rate Fund, dated June 26, 1995, which
Prospectuses are incorporated by reference herein, and the Annual Report to
Shareholders of Adjustable Rate Fund for the fiscal year ended February 28,
1995. The Statement of Additional Information of Adjustable Rate Fund, dated
June 26, 1995, and the Statement of Additional Information of Intermediate
Series, dated April 3, 1995, have been filed with the Securities and Exchange
Commission (SEC), are incorporated herein by reference and are available without
charge upon written request to Prudential Mutual Fund Services, Inc., Raritan
Plaza One, Edison, New Jersey 08837 or by calling the toll-free number above.
Additional information, contained in a Statement of Additional Information,
dated June 26, 1995, forming a part of Intermediate Series' Registration
Statement on Form N-14, has been filed with the SEC, is incorporated herein by
reference and is available without charge upon request to the address or
telephone number shown above.

This Prospectus and Proxy Statement will first be mailed to shareholders on
or about June 30, 1995.

Investors are advised to read and retain this Prospectus and Proxy
Statement for further reference.
------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

The date of this Prospectus and Proxy Statement is June 26, 1995.

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<PAGE> 3

PRUDENTIAL GOVERNMENT SECURITIES TRUST
(INTERMEDIATE TERM SERIES)
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.

ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292

---------------------

PROSPECTUS AND PROXY STATEMENT DATED JUNE 26, 1995
---------------------

SYNOPSIS

The following synopsis is a summary of certain information contained
elsewhere in this Prospectus and Proxy Statement and the Agreement and Plan of
Reorganization and Liquidation and is qualified by reference to the more
complete information contained herein as well as in the Prudential Adjustable
Rate Securities Fund, Inc. (Adjustable Rate Fund) Prospectus and the enclosed
Prudential Government Securities Trust -- Intermediate Term Series (Intermediate
Series) Prospectus. Shareholders should read the entire Prospectus and Proxy
Statement carefully.

GENERAL

This Proxy Statement is furnished by the Board of Directors of Adjustable
Rate Fund in connection with the solicitation of Proxies for use at a Special
Meeting of Shareholders of Adjustable Rate Fund (the Meeting) to be held at 3:00
P.M., on August 15, 1995 at 199 Water Street, New York, New York 10292,
Adjustable Rate Fund's principal executive office. The purpose of the Meeting is
to approve or disapprove an Agreement and Plan of Reorganization and Liquidation
(the Plan) whereby all of the assets of Adjustable Rate Fund will be acquired
by, and the liabilities of Adjustable Rate Fund, if any, will be assumed by,
Intermediate Series, and such other business as may properly come before the
Meeting or any adjournment thereof. The Plan is attached to this Prospectus and
Proxy Statement as Appendix B. The transactions contemplated by the Plan are set
forth herein and in summary provide that Intermediate Series will acquire the
assets, in exchange solely for shares of beneficial interest in Intermediate
Series, and assume the liabilities, if any, of Adjustable Rate Fund.

Approval of the Plan requires the affirmative vote of a majority of shares
of Adjustable Rate Fund outstanding and entitled to vote. Shareholders vote in
the aggregate and not by separate class. Approval of the Plan by the
shareholders of Intermediate Series is not required and the Plan is not being
submitted for their approval.

THE PROPOSED REORGANIZATION AND LIQUIDATION

The Board of Directors of Adjustable Rate Fund and the Trustees of
Intermediate Series have approved the Plan, which provides for the transfer of
all of the assets of Adjustable Rate Fund to Intermediate Series in exchange
solely for shares of beneficial interest in Intermediate Series and the
assumption by Intermediate Series of the liabilities, if any, of Adjustable Rate
Fund. Following shareholder approval, if obtained, shares of Intermediate Series
will be distributed to Class A and Class B shareholders of Adjustable Rate Fund,
and Adjustable Rate Fund will be liquidated. The reorganization will become
effective as soon as practicable after the Meeting. Each Adjustable Rate Fund
Class A and Class B shareholder will receive the number of full and

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<PAGE> 4

fractional shares of Intermediate Series equal in value (rounded to the third
decimal place) to such shareholder's Class A and Class B shares of Adjustable
Rate Fund as of the closing date.

For the reasons set forth below under "-- Reasons for the Proposed
Reorganization and Liquidation" and "The Proposed Transaction -- Reasons for the
Reorganization and Liquidation," the Board of Directors of Adjustable Rate Fund
and the Trustees of Intermediate Series, including those Directors/Trustees who
are not "interested persons" (Independent Directors/Trustees) as that term is
defined in the Investment Company Act of 1940, as amended (Investment Company
Act), have concluded that the reorganization would be in the best interests of
the shareholders of Adjustable Rate Fund and Intermediate Series and that the
interests of shareholders of each Fund will not be diluted as a result of the
proposed transaction. Accordingly, the Board of Directors of Adjustable Rate
Fund and the Trustees of Intermediate Series recommend approval of the Plan.

REASONS FOR THE PROPOSED REORGANIZATION AND LIQUIDATION

There are a number of similarities between the Funds. Each Fund is an
open-end, diversified investment company primarily seeking high income with
reasonable safety. Both Funds invest a significant portion of their assets in
U.S. Government and agency securities, although Adjustable Rate Fund, unlike
Intermediate Series, may also invest in asset-backed securities, corporate and
other debt obligations. However, the Trustees of Intermediate Series recently
approved modifications to the investment policies and restrictions of
Intermediate Series which will be submitted to shareholders of the Intermediate
Series for their approval at a special meeting scheduled to be held on or about
July 19, 1995 (the Special Meeting) authorizing Intermediate Series to, among
other things, invest in asset-backed securities, corporate and other debt
obligations similar to those in which Adjustable Rate Fund may invest. Should
the shareholders of the Intermediate Series approve the proposed modifications,
the investment policies of the Funds will be more closely aligned. Shareholders
of Adjustable Rate Fund should be aware that approval of these modifications by
Intermediate Series' shareholders is not a condition to completion of the
transactions described in this Proxy and Prospectus. In addition, there can be
no assurance that any or all of such modifications will be approved. For a
summary of the proposed modifications, see "-- Investment Objectives and
Policies" below.

The Funds are also similar in that: Prudential Mutual Fund Management, Inc.
(PMF or the Manager) serves as Manager to both Funds; The Prudential Investment
Corporation (PIC) serves as subadviser to both Funds; Prudential Securities
Incorporated (PSI) acts as the Distributor of the shares of Intermediate Series
and the Class B shares of Adjustable Rate Fund; and Prudential Mutual Fund
Services, Inc. (PMFS) is the Transfer Agent and Dividend Disbursing Agent for
each of the Funds. In addition, both Funds pay dividends of net investment
income, if any, monthly and make distributions of any net capital gains at least
annually.

Barbara L. Kenworthy, a managing director and senior portfolio manager of
Prudential Investment Advisors, a unit of PIC, is the portfolio manager of both
Adjustable Rate Fund and Intermediate Series. She is responsible for the day to
day management of the portfolios. Ms. Kenworthy succeeded David Graham in
managing the portfolios in May 1995, when Mr. Graham resigned from PIC. Ms.
Kenworthy joined PIC in July 1994, having previously been employed by The
Dreyfus Corporation (from June 1985 to June 1994) where she served as president
and portfolio manager for several Dreyfus fixed-income funds. Ms. Kenworthy also
serves as the portfolio manager of other investment companies advised by PIC.

There are also a number of differences between the Funds. See "-- Certain
Differences Between Intermediate Series and Adjustable Rate Fund" below.

Adjustable Rate Fund was incorporated on December 23, 1991, as a Maryland
corporation and commenced investment operations on June 10, 1992. Adjustable
Rate Fund has, in the current market environment, been unable to attract
sufficient new assets to offset redemptions and has incurred increased

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<PAGE> 5

expense ratios. As of April 30, 1995, Adjustable Rate Fund had approximately $56
million in assets, which represented a 56% decline in net assets from
approximately $128 million at February 28, 1994. As of February 28, 1994, net
assets had decreased by 50% from approximately $258 million at February 28,
1993. This decline in assets is not unique to Adjustable Rate Fund. Total assets
in the adjustable rate fund universe compiled by Lipper Analytical Services,
Inc. declined from $22 billion (52 funds) at the end of 1992, to approximately
$20 billion (74 funds) at the end of 1993, and then to approximately $10 billion
(87 funds) at the end of 1994. This suggests that the fund category, not just
Adjustable Rate Fund itself, may not be meeting a market need.

As a result of the decline in net assets, Adjustable Rate Fund has
experienced rising expense ratios and does not enjoy the economies of scale of
Intermediate Series. The ratio of total expenses to average net assets for the
Intermediate Series was .84% for the fiscal year ended November 30, 1994 while
the ratio of total expenses to average net assets for the Class A and Class B
shares of Adjustable Rate Fund was 1.07% and 1.03%, respectively, for the fiscal
year ended February 28, 1995. Adjustable Rate Fund shareholders have been
partially shielded from the rising expense ratios by virtue of the temporary
abatement of expenses incurred pursuant to plans adopted under Rule 12b-1 under
the Investment Company Act (12b-1 Plans) and related distribution and service
agreements. As of April 14, 1993, the distributor of Class B shares of
Adjustable Rate Fund no longer had any distribution expenses to be reimbursed by
Adjustable Rate Fund or to be recovered through contingent deferred sales
charges. Therefore, Adjustable Rate Fund has since then discontinued assessing
12b-1 fees on Class B shares unless or until the distributor incurs additional
costs reimbursable to it under the Class B 12b-1 Plan. In light of the fact that
Class B shares automatically convert to Class A shares after approximately one
year from purchase, the distributor of the Class A shares has agreed,
temporarily and voluntarily, to waive all payments to it under the Class A 12b-1
Plan. Class A shares to which the voluntary waiver applies currently constitute
almost 99% of Adjustable Rate Fund's assets. If the maximum level of fees
chargeable under Adjustable Rate Fund's Class A and Class B 12b-1 Plans (without
regard to the waiver or nonassessment of the respective 12b-1 fees) had been
incurred, the ratio of total expenses to average net assets for the Class A and
Class B shares of Adjustable Rate Fund would have been 1.57% and 2.03%,
respectively, as of the fiscal year ended February 28, 1995 as compared to .84%
for the Intermediate Series for the fiscal year ended November 30, 1994. Should
the proposed reorganization be consummated, shareholders will be subject to the
fee applicable to Intermediate Series pursuant to its 12b-1 Plan, which is
charged at the rate of up to .25 of 1% of Intermediate Series' average daily net
assets.

Below is total return information for the Class A and Class B shares of
Adjustable Rate Fund for the fiscal years ended February 28, 1993, 1994 and
1995, and for the shares of Intermediate Series for the fiscal years ended
November 30 since 1985. The following table is derived from the "Financial
Highlights" of each Fund. "Financial Highlights" for Intermediate Series are set
forth in Intermediate Series' Prospectus, which accompanies this Prospectus and
Proxy Statement and below under "Information about Intermediate

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<PAGE> 6

Series -- Financial Information." "Financial Highlights" for Adjustable Rate
Fund are set forth in Adjustable Rate Fund's Prospectus and Annual Report, each
of which accompanies this Prospectus and Proxy Statement.

<TABLE>
<CAPTION>
ADJUSTABLE RATE FUND
------------------------------------------------------
CLASS A CLASS B
------------------------ ------------------------
JUNE JUNE
10, 10,
YEAR YEAR 1992* YEAR YEAR 1992*
ENDED ENDED THROUGH ENDED ENDED THROUGH
FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY
28, 28, 28, 28, 28, 28,
1995 1994 1993 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
TOTAL RETURN**........... 3.07% 1.24% 2.92% 2.96% 1.58% 2.56%
</TABLE>

- ---------------
* Commencement of investment operations.

** Total return does not consider the effect of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestments of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.

<TABLE>
<CAPTION>
INTERMEDIATE SERIES
----------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30,
----------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
------ ---- ---- ----- ---- ----- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL RETURN*............ (2.58)% 8.26% 7.40% 12.19% 6.73% 11.12% 6.47% 1.87% 16.48% 15.67%
</TABLE>

- ---------------
* Total return is calculated assuming a purchase of shares on the first day and
a sale on the last day of each year reported and includes reinvestment of
dividends and distributions.

The proposed transaction would give Intermediate Series the opportunity to
increase its assets by acquiring securities consistent with its investment
objective and policies in exchange for the issuance of its shares.

The Board of Directors of Adjustable Rate Fund has determined that approval
of the Plan would be in the best interests of Adjustable Rate Fund and its
shareholders for the reasons discussed above. See also "The Proposed
Transaction -- Reasons for the Reorganization and Liquidation" below.

CERTAIN DIFFERENCES BETWEEN INTERMEDIATE SERIES AND ADJUSTABLE RATE FUND

While the investment objective of both Funds is similar, there are
important differences between the Funds. The investment objective of
Intermediate Series is to achieve a high level of income consistent with
providing reasonable safety. Intermediate Series has sought to achieve this
objective by investing principally (at least 80% of total assets) in a
diversified portfolio of intermediate-term securities (primarily 3 to 5 year
maturities) issued or guaranteed by the United States Government, its agencies
or instrumentalities, including mortgage-backed "pass-through" securities, such
as those issued by the Government National Mortgage Association (GNMA) and the
Federal National Mortgage Association (FNMA), and repurchase agreements. While
the investment objective of Adjustable Rate Fund is high current income
consistent with low volatility of principal, it has sought to achieve its
objective by investing at least 65% of its assets in adjustable rate securities,
including mortgage-backed securities issued or guaranteed by private
institutions or the U.S. Government, its agencies or its instrumentalities,
asset-backed securities, and corporate or other debt obligations, all of which
have interest rates which reset at periodic intervals, with the remaining 35% of
its total assets being invested in fixed rate securities. Additionally, all
securities purchased by Adjustable Rate Fund must be rated at least "A" by
Moody's Investors Service, Inc. (Moody's) or Standard & Poor's Ratings Group
(S&P) or if unrated, determined to be of comparable quality by the Fund's
investment adviser.

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<PAGE> 7

The investment policies of Adjustable Rate Fund have permitted greater
investment flexibility than the investment policies of Intermediate Series.
Adjustable Rate Fund may purchase put and call options and sell covered call
options on national exchanges and in the over-the-counter markets, as well as
enter into futures contracts and options on futures contracts, interest rate
swap transactions and short sales. Adjustable Rate Fund and the Intermediate
Series may each borrow for certain purposes although (i) Intermediate Series may
pledge only up to 20% of its total assets to secure borrowings whereas
Adjustable Rate Fund may pledge up to 33 1/3% of its total assets to secure
borrowings and (ii) Adjustable Rate Fund may borrow to take advantage of
investment opportunities while Intermediate Series may borrow only for temporary
or emergency purposes. With respect to illiquid securities, Intermediate Series
may invest up to 10% of its assets in securities for which there is no readily
available market whereas Adjustable Rate Fund may invest up to 15% of its net
assets in such securities.

Unlike Intermediate Series, which currently offers one class of shares sold
without a sales charge imposed either at time of purchase or on a deferred
basis, Adjustable Rate Fund offers Class A shares, which are sold with a sales
charge imposed at time of purchase, and Class B shares, which may be subject to
a sales charge on a deferred basis.

In determining whether to approve the Plan, shareholders of Adjustable Rate
Fund should consider that the Trustees of Intermediate Series recently approved
certain modifications to the investment policies and fundamental investment
restrictions for Intermediate Series which may have a significant effect on
Intermediate Series. It is anticipated that such modifications will be submitted
to shareholders of Intermediate Series on or about July 19, 1995 for their
approval at the Special Meeting. For a description of the proposed
modifications, see "-- Investment Objectives and Policies" below. Such
modifications, if adopted, would subject Intermediate Series to additional
investment considerations. See "Principal Risk Factors" below. Shareholders of
Adjustable Rate Fund should be aware that approval of these modifications by
Intermediate Series' shareholders is not a condition to completion of the
transactions described in this Proxy and Prospectus, and that there can be no
assurance that any or all of such modifications will be approved.

The management fee for Intermediate Series is charged at an annual rate of
.40 of 1% of Intermediate Series' average daily net assets, whereas Adjustable
Rate Fund is charged a management fee at an annual rate of .50 of 1% of its
average daily net assets. If the proposed reorganization is consummated,
Adjustable Rate Fund shareholders will receive shares of Intermediate Series and
such shareholders will be subject to Intermediate Series' lower management fee.

Intermediate Series' shareholders are subject to a distribution and service
fee that reimburses PSI for its expenses at an annual rate of the lesser of (a)
.25 of 1% per annum of the aggregate sales of Intermediate Series' shares (not
including shares issued in connection with reinvestment of dividends and capital
gains distributions, issued on or after July 1, 1985, the effective date of the
12b-1 Plan) or (b) .25 of 1% per annum of the average daily net asset value of
the Intermediate Series shares issued after the effective date of the 12b-1
Plan.

Approximately 99% of the shareholders of Adjustable Rate Fund hold Class A
shares. The remaining shareholders hold Class B shares. The Class A shareholders
are subject to distribution-related fees charged at an annual rate of up to .50
of 1% of the average daily net assets of the Class A shares based on
reimbursable costs. Prudential Mutual Fund Distributors, Inc. (PMFD), the
distributor of the Class A shares, is currently waiving any distribution-related
fee. The ratio of total expenses to average net assets for the Class A shares
for the fiscal year ended February 28, 1995, was 1.07%. If PMFD did not waive
its distribution-related fee the expense ratio would have been 1.57%. Class B
shareholders of Adjustable Rate Fund pay a distribution-related fee to PSI based
upon reimbursable costs. This fee is currently not being assessed because PSI
has no

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reimbursable costs. If there are reimbursable costs, such fee is payable at an
annual rate up to 1% of the average daily net assets of Adjustable Rate Fund's
Class B shares. If the proposed reorganization is consummated, Class A and Class
B shareholders of Adjustable Rate Fund will be subject to a lower rate of
distribution-related fee (.50 of 1% or 1%, respectively, versus the Intermediate
Series rate of .25 of 1%). In addition, if Intermediate Series' shareholders
approve a proposed change to the Intermediate Series' 12b-1 Plan from a
reimbursement to a compensation plan at the Special Meeting, and the proposed
reorganization is consummated, Adjustable Rate Fund shareholders' fees would no
longer be based upon reimbursable costs. The ratio of total expenses to average
net assets for the Class B shares for the fiscal year ended February 28, 1995,
was 1.03%. If there were reimbursable costs and the maximum amount of expenses
were incurred under the 12b-1 Plan, the expense ratio with respect to Class B
shares would have been 2.03%. The ratio of total expenses to average net assets
for the Intermediate Series was .84% for the fiscal year ended November 30,
1994. If the proposed reorganization is consummated, Adjustable Rate Fund Class
A and Class B shareholders would be subject to Intermediate Series' lower
distribution-related fee rate.

As of November 30, 1994, distribution expenses of Intermediate Series have
exceeded the maximum amount payable under its 12b-1 Plan by $11,346,000. As long
as the Intermediate Series' current 12b-1 Plan remains in effect, such amount
will be carried forward and may be recovered by PSI in the future from the
assets of Intermediate Series. If the transaction is approved and such amounts
are paid by Intermediate Series in the future, shareholders of Adjustable Rate
Fund may bear a part of the cost of repayment. At the Special Meeting,
shareholders of Intermediate Series will be asked to approve changing its 12b-1
Plan from a "reimbursement" plan to a "compensation" plan. If this change is
approved by Intermediate Series shareholders, any such previously expended
amounts will no longer be carried forward, however, Intermediate Series would
still be required to pay as compensation the distribution fee rate of .25 of 1%.
Amounts expended under the Adjustable Rate Fund 12b-1 Plans have not exceeded
the maximum amounts payable under its 12b-1 Plans. If Intermediate Series'
shareholders approve the change, and if the proposed reorganization is
consummated, Adjustable Rate Fund shareholders would become subject to a 12b-1
Plan that compensates the distributor for providing distribution-related
services, rather than reimburses the distributor for expenses actually incurred.
Although the annual maximum fee rate applicable to Intermediate Series would
continue to be .25 of 1% under the amended 12b-1 Plan, the amounts payable under
the 12b-1 Plan would no longer directly relate to the expenses actually
incurred. Consequently, if the distributor's expenses are less than its fees
under the amended plan, the distributor would retain its full fees and realize a
profit. However, if the distributor's expenses exceed the distribution and
service fees received under the 12b-1 Plan, the distributor would not be able to
carry forward the excess for reimbursement in future years.

PMFS, as Transfer Agent and Dividend Disbursing Agent for each of the
Funds, receives fees which include an annual fee per shareholder account ($13 in
the case of Intermediate Series and $15 in the case of Adjustable Rate Fund), a
$2 new set-up fee for each manually-established account and a monthly inactive
zero balance account fee per shareholder account. If the proposed reorganization
is consummated Adjustable Rate Fund shareholders would be subject to
Intermediate Series' lower annual fee.

The organizational structure of each Fund is different. Intermediate Term
Series is a separate portfolio of a Massachusetts business trust. Adjustable
Rate Fund is a Maryland corporation. See "Structure of Intermediate Series and
Adjustable Rate Fund" and "Certain Comparative Information About the Funds"
below.

STRUCTURE OF INTERMEDIATE SERIES AND ADJUSTABLE RATE FUND

Prudential Government Securities Trust is organized as a Massachusetts
business trust and its Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial

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<PAGE> 9

interest in separate series and classes within such series. Prudential
Government Securities Trust consists of three separate portfolios, one of which
is Intermediate Series. Intermediate Series consists of one class of shares.
Each shareholder is entitled to a full vote for each full share ($.01 par value
per share) of beneficial interest held. Each share is equal as to earnings,
assets and voting privileges, and there are no conversion, preemptive or other
subscription rights. In the event of liquidation, each share of Intermediate
Series is entitled to its portion of all of such Fund's assets after all debts
and expenses of that Fund have been paid.

Adjustable Rate Fund is organized as a Maryland corporation and is
authorized to issue 2 billion shares of common stock, $.001 par value per share,
divided into two classes designated Class A and Class B common stock, each of
which consists of 1 billion authorized shares. Both Class A and Class B common
stock represent an interest in the same assets of the Fund and are identical in
all respects except that each class bears certain distribution expenses and has
exclusive voting rights with respect to its distribution fee. The Fund has
received an order of the Securities and Exchange Commission (SEC) permitting the
issuance and sale of multiple classes of common stock. Currently, the Fund is
offering only two classes, designated as Class A and Class B shares. Each share
of each class of common stock is equal as to earnings, assets and voting
privileges, except as noted above, and each class bears the expenses related to
the distribution of its shares. Except for the conversion feature applicable to
the Class B shares, there are no conversion, preemptive or other subscription
rights. In the event of liquidation, each share of common stock of Adjustable
Rate Fund is entitled to its portion of all of such Fund's assets after all debt
and expenses of that Fund have been paid. Since Class B shares generally bear
higher distribution expenses than Class A shares, the liquidation proceeds to
shareholders of Class B shares are likely to be lower than to Class A
shareholders.

Both Adjustable Rate Fund's Articles of Incorporation and Prudential
Government Securities Trust's Declaration of Trust permit each Fund's respective
Directors/Trustees to authorize the creation of additional series of common
stock/beneficial interest and classes within such series, with such preferences,
privileges, limitations and voting and dividend rights as the Directors/Trustees
may determine. The Directors/Trustees may increase the number of authorized
shares without the approval of shareholders. Shares of each Fund, when issued as
described in each Fund's Prospectus, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of each Fund under certain circumstances. Neither
Fund's shares have cumulative voting rights for the election of its respective
Directors/Trustees.

INVESTMENT OBJECTIVES AND POLICIES

The investment objective of Intermediate Series is to achieve a high level
of income consistent with providing reasonable safety by investing in a
diversified portfolio of intermediate term securities issued or guaranteed by
the United States Government or its agencies or instrumentalities. There is no
assurance that Intermediate Series' investment objective will be achieved. As of
the date of this Proxy and Prospectus, Intermediate Series will invest at least
80% of its total assets in these types of government securities. However, the
Trustees of Intermediate Series recently approved modifications to the
investment policies and restrictions of Intermediate Series which will be
submitted to shareholders of the Intermediate Series for their approval at the
Special Meeting. The changes to the Intermediate Series' investment policies and
restrictions are summarized below.

A number of the Intermediate Series' investment policies and restrictions
are proposed to be eliminated or modified which would permit the Intermediate
Series, among other things, (1) to reduce the percentage of its total assets
which must be invested in government securities to 65% (currently 80%); (2) to
invest up to 35% of its total assets in corporate and other
non-governmental/agency debt obligations, including, but not limited to,
collateralized mortgage obligations, stripped mortgaged-backed securities and
asset-backed

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securities rated at least A by S&P or Moody's or, if unrated, determined to be
of comparable quality by the investment adviser; (3) to shorten its maximum
weighted average maturity to less than 5 years (currently 10 years) and change
its name to the "Short-Intermediate Term Series"; (4) to invest up to 15% of its
net assets in securities with legal or contractual restrictions on resale and
other illiquid securities; (5) to enter into interest rate swap transactions;
(6) to purchase and sell options and financial futures contracts and options
thereon; (7) to enter into short sales; and (8) to increase its borrowing limit
to 33 1/3% from 20% of its total assets and to borrow to take advantage of
investment opportunities. If approved, the proposed modifications of
Intermediate Series' investment policies will subject Intermediate Series'
shareholders to certain additional risks. See "Principal Risk Factors" below.

Should the shareholders of Intermediate Series approve the above changes,
the investment policies of the Funds will be more closely aligned. Approval of
the proposed changes by the shareholders of Intermediate Series, however, is not
a condition to completion of the transactions described in the Plan. In
addition, there can be no assurance that any or all of these proposed
modifications will be approved by the shareholders of Intermediate Series.

The investment objective of Adjustable Rate Fund is high current income
consistent with low volatility of principal. Adjustable Rate Fund seeks to
achieve its objective by investing, under normal circumstances, at least 65% of
its total assets in adjustable rate securities, including mortgage-backed
securities issued or guaranteed by private institutions or the U.S. Government,
its agencies or instrumentalities, asset-backed securities and corporate and
other debt obligations, all of which have interest rates which reset at periodic
intervals. The Fund may invest the remainder of its assets in fixed rate
securities. The Fund expects that under normal market conditions at least 75% of
the value of the securities purchased by the Fund (excluding options and
futures) will be rated "AA" or "AAA" by S&P or "Aa" or "Aaa" by Moody's or, if
unrated, will be determined to be of comparable quality by the Manager. The Fund
expects that under normal market conditions the remaining 25% of the value of
the securities purchased by the Fund (excluding options and futures) will be
rated "A" by Moody's or S&P or, if unrated, determined to be of comparable
quality by the investment adviser. The Fund may also purchase and sell put and
call options on securities and financial indices and engage in transactions
involving futures contracts and related options. While these options and futures
contracts are not themselves rated, the securities acquired pursuant to these
options and futures contracts will be rated at least "A" by S&P or Moody's or,
if unrated, will be determined to be of comparable quality by the investment
adviser. In addition, the Fund may engage in short selling and use leverage,
including reverse repurchase agreements, dollar rolls and bank borrowings, which
entails additional risks to the Fund. There can be no assurance that Adjustable
Rate Fund's investment objective will be achieved.

The portfolio manager of Intermediate Series anticipates some realignment
of the combined Fund's investment portfolio following the consummation of the
transaction. Adjustable Rate Fund is generally a shorter-term fund with an
average maturity of 1-2 years. Intermediate Series is an intermediate term fund
with average maturity between 3-5 years and a maximum average maturity of any
single holding of 10 years. It is anticipated that the combined Fund will have a
short-intermediate term position with a maximum weighted average maturity of
less than 5 years.

Under normal circumstances Adjustable Rate Fund invests at least 65% of its
total assets in adjustable rate securities. The Intermediate Series can invest
in adjustable rate securities and may commit any amount of total assets towards
investment in such securities. It is anticipated that the investment adviser of
the combined Fund will not commit a specific percentage of the Fund's total
assets to adjustable rate securities, but rather will select among fixed-income
and adjustable rate securities as it deems appropriate to meet the combined
Fund's investment objective and investment maturity guidelines. The combined
Fund's investment objective is to achieve a high level of income consistent with
providing reasonable safety.

9
<PAGE> 11

FEES AND EXPENSES

MANAGEMENT FEES. PMF, the Manager of each Fund and a wholly-owned
subsidiary of The Prudential Insurance Company of America (Prudential), is
compensated, pursuant to a management agreement with Adjustable Rate Fund, at an
annual rate of .50 of 1% of the average daily net assets of Adjustable Rate
Fund, and, pursuant to a management agreement with Intermediate Series, at an
annual rate of .40 of 1% of the average daily net assets of Intermediate Series.

Under Subadvisory Agreements between PMF and PIC with respect to both
Funds, PIC, as Subadviser, provides investment advisory services for the
management of each Fund. Pursuant to the Subadvisory Agreements, PMF will
reimburse PIC for its reasonable costs and expenses in providing subadvisory
services. PMF continues to have responsibility for all investment advisory
services pursuant to the Management Agreements for both Funds and supervises the
Subadviser's performance of its services on behalf of each Fund.

DISTRIBUTION FEES. PMFD, a wholly-owned subsidiary of PMF, serves as the
distributor of the Class A shares of Adjustable Rate Fund. Prudential Securities
Incorporated (Prudential Securities or PSI), a wholly-owned subsidiary of
Prudential, serves as the distributor for Class B shares of Adjustable Rate Fund
and for shares of Intermediate Series. PMFD and PSI incur distribution expenses
under separate 12b-1 Plans adopted by each Fund and under separate distribution
agreements. These expenses include (i) commissions and account servicing fees,
(ii) advertising expenses, (iii) the cost of printing and mailing prospectuses
and (iv) indirect and overhead costs associated with the sale of each Fund's
shares.

Intermediate Series, under its 12b-1 Plan, reimburses PSI for its
distribution-related expenses with respect to Intermediate Series at the annual
rate of the lesser of (a) .25 of 1% per annum of the aggregate sales of
Intermediate Series' shares, not including shares issued in connection with
reinvestment of dividends and capital gains distributions, issued on or after
July 1, 1985 (the effective date of the Plan) less the aggregate net asset value
of any such shares redeemed, or (b) .25 of 1% per annum of the average daily net
asset value of the shares issued after the effective date of the 12b-1 Plan.
Such amounts are accrued daily and paid monthly and average daily net assets are
calculated on the basis of Intermediate Series' fiscal year.

Actual distribution expenses for any given year may exceed the fees
received pursuant to the current 12b-1 Plan and will be carried forward and paid
by Intermediate Series in future years so long as Intermediate Series' current
12b-1 Plan is in effect.

For the fiscal year ended November 30, 1994, PSI received $665,503 from
Intermediate Series under its 12b-1 Plan. It is estimated that PSI spent
$665,503 on behalf of the Series. At November 30, 1994, the aggregate amount of
distribution expenses incurred by PSI and not yet reimbursed by Intermediate
Series was approximately $11,346,000, which represented 4.7% of Intermediate
Series' net assets. These unreimbursed amounts may be recovered by PSI through
future payments under the current 12b-1 Plan.

For the fiscal year ended November 30, 1994, Intermediate Series paid
distribution expenses under its 12b-1 Plan of .21 of 1% of its average net
assets. Intermediate Series records all payments made under its 12b-1 Plan as
expenses in the calculation of its net investment income.

As discussed above under "Certain Differences Between Intermediate Series
and Adjustable Rate Fund," subject to approval at the Special Meeting, the
Intermediate Series' 12b-1 Plan will be changed from a reimbursement type plan
to a compensation type plan. The proposed change will not affect the maximum
annual fee payable under Intermediate Series 12b-1 Plan. If approved, the amount
payable under the Intermediate Series 12b-1 Plan would no longer directly relate
to the expenses actually incurred and any

10
<PAGE> 12

amounts previously expended and unreimbursed by Intermediate Series would no
longer be carried forward for possible payment by the Fund.

Adjustable Rate Fund under its 12b-1 Plan with respect to Class A shares
(the Class A Plan) may reimburse PMFD for its distribution-related expenses with
respect to Class A shares at an annual rate of up to .50 of 1% of the average
daily net assets of the Class A shares. The Class A Plan provides that (i) up to
.25 of 1% of the average daily net assets of the Class A shares may be used to
pay for personal service and the maintenance of shareholder accounts (service
fee) and (ii) total distribution fees (including the service fee of .25 of 1%)
may not exceed .50 of 1%. Unlike the Adjustable Rate Fund 12b-1 Plan with
respect to the Class B shares (the Class B Plan), there are no carry forward
amounts under the Class A Plan and interest expenses are not incurred under the
Class A Plan.

For the fiscal year ended February 28, 1995, PMFD incurred
distribution-related expenses of $445,344 under the Class A Plan and waived its
entire distribution fee. For this period, PMFD received approximately $1,900 in
initial sales charges. As PMFD has agreed to waive, temporarily and voluntarily,
all payments to it under the Class A Plan, the Fund has discontinued assessing
12b-1 fees on the Class A shares and will not resume assessing such fees unless
and until payments are resumed to PMFD under the Class A Plan. PMFD may
terminate its waiver of payments under the Class A Plan at any time and, in such
event, Adjustable Rate Fund will once again assess 12b-1 fees on the Class A
shares.

Under the Class B Plan, Adjustable Rate Fund, reimburses PSI for its
distribution-related expenses with respect to Class B shares (asset-based sales
charges) at an annual rate of up to .75 of 1% of the average daily net assets of
the Class B shares. PSI recovers the distribution expenses it incurs through the
receipt of reimbursement payments from Adjustable Rate Fund under the Class B
Plan and the receipt of contingent deferred sales charges from certain redeeming
shareholders. For the fiscal year ended February 28, 1995, PSI received
approximately $5,000 in contingent deferred sales charges.

The Class B Plan also provides for the payment of a service fee to PSI at a
rate not to exceed .25 of 1% of the average daily net value of the Class B
shares. The service fee is used to pay financial advisers for personal service
and/or the maintenance of shareholder accounts.

Actual distribution expenses (asset-based sales charges) for Class B shares
for any given year may exceed the fees received pursuant to the Class B Plan and
will be carried forward and paid by Adjustable Rate Fund in future years so long
as the Class B Plan is in effect. Interest is accrued monthly on such carry
forward amounts at a rate comparable to that paid by PSI for bank borrowings.

The aggregate distribution fee for Class B shares (asset-based sales
charges plus service fees) will not exceed the annual rate of 1% of the average
daily net asset value of Class B shares under the Class B Plan.

As of April 14, 1993, the Distributor no longer had any distribution
expenses not yet reimbursed by Adjustable Rate Fund or recovered through
contingent deferred sales charges. Therefore Adjustable Rate Fund has
discontinued assessing any 12b-1 fees on the Class B shares and will not resume
assessing 12b-1 fees on the Class B shares unless and until PSI incurs
additional costs reimbursable to it under the Class B Plan. Until such time, all
contingent deferred sales charges collected on the redemption of Class B shares
will be paid to Adjustable Rate Fund.

For the fiscal year ended February 28, 1995, Adjustable Rate Fund did not
pay distribution expenses relating to either the Class A or Class B shares of
Adjustable Rate Fund. Adjustable Rate Fund records all payments, if any, made
under its 12b-1 Plans as expenses in the calculation of net investment income.

11
<PAGE> 13

OTHER EXPENSES. Each Fund also pays certain other expenses in connection
with its operation, including accounting, custodian, legal, audit, transfer
agency and registration expenses.

FEE WAIVERS AND SUBSIDY. PMF may from time to time waive all or a portion
of its management fee and subsidize all or a portion of the operating expenses
of each Fund. Fee waivers and expense subsidies will increase a fund's yield and
total return. The distributors of the Funds' shares may also from time to time
waive all or a portion of the distribution expenses reimbursable to them under
the Funds' respective 12b-1 Plans. Any fee waiver or subsidy may be terminated
at any time without notice after which a Fund's expenses will increase and its
yield and total return will be reduced.

EXPENSE RATIOS. For the fiscal year ended February 28, 1995, total
expenses stated as a percentage of average net assets of Adjustable Rate Fund
were 1.07% and 1.03% for Class A and Class B shares, respectively, net of PMFD's
distribution fee waiver. For the fiscal year ended November 30, 1994, total
expenses stated as a percentage of average net assets of Intermediate Series
were .84%.

Set forth below is a comparison of each Fund's operating expenses for the
fiscal year ended February 28, 1995, in the case of Adjustable Rate Fund, and
the fiscal year ended November 30, 1994, in the case of Intermediate Series. The
ratios are also shown on a pro forma (estimated) combined basis, giving effect
to the reorganization.

<TABLE>
<CAPTION>
ADJUSTABLE RATE
FUND
----------------- PRO
ANNUAL FUND OPERATING EXPENSES (AS A CLASS CLASS INTERMEDIATE FORMA
PERCENTAGE OF AVERAGE NET ASSETS) A B SERIES COMBINED
- --------------------------------------------- ---- ---- --- ---
<S> <C> <C> <C> <C>
Management Fees.............................. .50% .50% .40% .40%
12b-1 Fees................................... 0* 0 .21 .21
Other Expenses............................... .57 .53 .23 .25
---- ---- --- ---
Total Fund Operating Expenses................ 1.07% 1.03% .84% .86%
==== ==== === ===
</TABLE>

- ---------------
* Fees were waived for the year ended February 28, 1995. Total Fund Operating
Expenses had the fees not been waived would have been 1.57% for the Class A
shares.

Set forth below is an example which shows the expenses that an investor in
the combined Fund would pay on a $1,000 investment, based upon the pro forma
ratios set forth above.

<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
- ----------------------------------------------------- --- --- --- ----
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period.......... $ 9 $27 $48 $106
You would pay the following expenses on the same
investment, assuming no redemption................... $ 9 $27 $48 $106
</TABLE>

The example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.

PURCHASES AND REDEMPTIONS

Purchases of shares of Intermediate Series and Adjustable Rate Fund are
made through PSI, Pruco Securities Corporation (Prusec), or directly from the
respective Fund through their transfer agent, PMFS, at the net asset value per
share next determined after receipt of a purchase order by PMFS, Prusec or PSI
plus,

12
<PAGE> 14

in the case of Adjustable Rate Fund, a sales charge which may be imposed either
(i) at the time of purchase (Class A shares) or (ii) on a deferred basis (Class
B shares).

The minimum initial investment for Class A and Class B shares of Adjustable
Rate Fund is $5,000 per class and the minimum subsequent investment is $1,000
for each class. All minimum investment requirements are waived for certain
retirement and employee savings plans or custodial accounts for the benefit of
minors. For purchases of Class B shares made through the Automatic Savings
Accumulation Plan, the minimum initial and subsequent investment is $50. Class A
shares are sold with an initial sales charge of up to 1.00% of the offering
price. Class B shares are sold without an initial sales charge but are subject
to a contingent deferred sales charge of 1% which will be imposed on redemptions
made within one year of purchase. Although Class B shares are subject to higher
ongoing distribution-related expenses than Class A shares, Class B shares will
automatically convert to Class A shares (which are subject to lower ongoing
distribution-related expenses) after the one year contingent deferred sales
charge has expired.

The minimum initial investment in Intermediate Series is $1,000 and the
minimum subsequent investment is $100. There is no minimum investment required
for certain retirement and employee savings plans or custodial accounts for the
benefit of minors. For purchases made through the Automatic Savings Accumulation
Plan the minimum initial and subsequent investment is $50. Shares of
Intermediate Series are available for purchase without an initial sales charge
or a contingent deferred sales charge.

Shares of each Fund may be redeemed at any time at the net asset value next
determined after PSI or PMFS receives the sell order. As indicated above, the
proceeds of redemptions of Class B shares of Adjustable Rate Fund are subject to
a contingent deferred sales charge. No contingent deferred sales charges will be
imposed in connection with the reorganization.

EXCHANGE PRIVILEGES

Shareholders of both Adjustable Rate Fund and Intermediate Series have an
exchange privilege with certain other Prudential Mutual Funds, including one or
more specified money market funds, subject to the minimum investment
requirements of such funds. Class A and Class B shares of Adjustable Rate Fund
may be exchanged for Class A shares of another fund on the basis of relative net
asset value. No sales charge will be imposed at the time of the exchange. Any
applicable contingent deferred sales charge payable upon the redemption of
shares exchanged will be calculated from the first day of the month after the
initial purchase excluding the time shares were held in a money market fund.
Except for exchanges into the Global Assets Portfolio of Prudential Short-Term
Global Income Fund, Inc., once shares are exchanged out of Adjustable Rate Fund
pursuant to the exchange privilege, they may not be re-exchanged for shares of
Adjustable Rate Fund. Shares of Intermediate Series may be exchanged for Class A
shares of another fund on the basis of the relative net asset value plus the
applicable sales charge (no additional sales charge is imposed in connection
with subsequent exchanges). Intermediate Series shareholders may not exchange
their shares for Class B or Class C shares of the Prudential Mutual Funds,
except in very limited circumstances. With respect to both Funds, an exchange
will be treated as a redemption and purchase for tax purposes.

DIVIDENDS AND DISTRIBUTIONS

Each Fund expects to pay dividends of net investment income, if any,
monthly and make distributions of any net capital gains at least annually.
Shareholders of both Funds receive dividends and other distributions in
additional shares of the Fund unless they elect to receive them in cash. An
Adjustable Rate Fund shareholder's election with respect to reinvestment of
dividends and distributions in Adjustable Rate Fund will

13
<PAGE> 15

be automatically applied with respect to Intermediate Series shares he or she
receives pursuant to the reorganization.

FEDERAL TAX CONSEQUENCES OF PROPOSED REORGANIZATION

Prior to the consummation of the reorganization, the Funds shall have
received an opinion of Shereff, Friedman, Hoffman & Goodman, LLP to the effect
that the proposed reorganization will constitute a tax-free reorganization
within the meaning of Section 368(a)(1)(C) of the Internal Revenue Code of 1986,
as amended (the Internal Revenue Code). Accordingly, no gain or loss will be
recognized to either Fund upon the transfer of assets and the assumption of
liabilities, if any, or to shareholders of Adjustable Rate Fund upon their
receipt of shares of Intermediate Series solely in return for shares of
Adjustable Rate Fund. The tax basis for the shares of Intermediate Series
received by Adjustable Rate Fund shareholders will be the same as their tax
basis for the shares of Adjustable Rate Fund to be constructively surrendered in
exchange therefor. In addition, the holding period of the shares of Intermediate
Series to be received pursuant to the reorganization will include the period
during which the shares of Adjustable Rate Fund to be constructively surrendered
in exchange therefor were held, provided the latter shares were held as capital
assets by the shareholders on the date of the exchange. See "The Proposed
Transaction -- Tax Considerations."

PRINCIPAL RISK FACTORS

Investors in Intermediate Series should recognize that United States
Government securities including those which are guaranteed by Federal agencies
or instrumentalities, may or may not be backed by the "full faith and credit" of
the United States. In the case of securities not backed by the full faith and
credit of the United States, the Intermediate Series must look principally to
the agency issuing or guaranteeing the obligation for ultimate repayment and may
not be able to assert a claim against the United States itself in the event the
agency or instrumentality does not meet its commitments. Intermediate Series may
borrow an amount equal to no more than 20% of the value of its total assets
(calculated when the loan is made) from banks for temporary, extraordinary or
emergency purposes and pledge up to 20% of its total assets to secure such
borrowings.

If certain modifications to the investment policies and restrictions of
Intermediate Series are approved by its shareholders at the Special Meeting,
investments in Intermediate Series will be subject to certain risks not
previously present. Such additional risks, however, are many of the same risks
to which investments in Adjustable Rate Fund are currently subject. At the
Special Meeting, shareholders of Intermediate Series will consider, among other
things, modification of Intermediate Series' investment policies and
restrictions to permit the following: (1) to reduce the percentage of its total
assets which must be invested in government securities to 65% (currently 80%);
(2) to invest up to 35% of its total assets in corporate and other non-
governmental/agency debt obligations, including, but not limited to,
collateralized mortgage obligations, stripped mortgaged-backed securities and
asset-backed securities rated at least A by S&P or Moody's or, if unrated,
determined to be of comparable quality by the investment adviser; (3) to shorten
its maximum weighted average maturity to 5 years (currently 10 years) and change
its name to the "Short-Intermediate Term Series"; (4) to invest up to 15% of its
net assets in securities with legal or contractual restrictions on resale and
other illiquid securities; (5) to enter into interest rate swap transactions;
(6) to purchase and sell options and financial futures contracts and options
thereon; (7) to enter into short sales; and (8) to increase its borrowing limit
to 33 1/3% from 20% of its total assets and borrow to take advantage of
investment opportunities.

For a discussion of the risks attendant to such investments, please see
"Fund Highlights -- Risk Factors and Special Characteristics" and "How the Fund
Invests" in the Adjustable Rate Fund Prospectus dated

14
<PAGE> 16

June 26, 1995, which accompanies this Prospectus and Proxy Statement and is
incorporated herein by reference.

THE PROPOSED TRANSACTION

AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION

The terms and conditions under which the proposed transaction may be
consummated are set forth in the Plan. Significant provisions of the Plan are
summarized below; however, this summary is qualified in its entirety by
reference to the Plan, a copy of which is attached as Appendix B to this
Prospectus and Proxy Statement.

The Plan contemplates (i) Intermediate Series acquiring all of the assets
of Adjustable Rate Fund in exchange solely for shares of Intermediate Series and
the assumption by Intermediate Series of Adjustable Rate Fund's liabilities, if
any, as of the Closing Date (hereafter defined) and (ii) the constructive
distribution on the date of the exchange, expected to occur on or about August
24, 1995 (the "Closing Date") of such shares of Intermediate Series to the Class
A and Class B shareholders of Adjustable Rate Fund as provided for by the Plan.

The assets of Adjustable Rate Fund to be acquired by Intermediate Series
shall include, without limitation, all cash, cash equivalents, securities,
receivables (including interest and dividends receivable) and other property of
any kind owned by Adjustable Rate Fund and any deferred or prepaid assets shown
as assets on the books of Adjustable Rate Fund. Intermediate Series will assume
from Adjustable Rate Fund all debts, liabilities, obligations and duties of
Adjustable Rate Fund of whatever kind or name, if any; provided, however, that
Adjustable Rate Fund will utilize its best efforts, to the extent practicable,
to discharge all of its known debts, liabilities, obligations and duties prior
to the Closing Date. Intermediate Series will deliver to Adjustable Rate Fund
shares of Intermediate Series, which Adjustable Rate Fund will then distribute
to its Class A and Class B shareholders.

The value of Adjustable Rate Fund assets to be acquired and liabilities to
be assumed by Intermediate Series and the net asset value of a share of
Intermediate Series will be determined as of 4:15 P.M., New York time, on the
Closing Date will be determined in accordance with the valuation procedures of
the respective Fund's then-current prospectus and statement of additional
information.

As soon as practicable after the Closing Date, Adjustable Rate Fund will
liquidate and distribute pro rata to its shareholders of record the shares of
Intermediate Series received by Adjustable Rate Fund in exchange for such
shareholders' interest in Adjustable Rate Fund evidenced by their shares of
common stock of Adjustable Rate Fund. Such liquidation and distribution will be
accomplished by opening accounts on the books of Intermediate Series in the
names of Adjustable Rate Fund shareholders and by transferring thereto the
shares of Intermediate Series previously credited to the account of Adjustable
Rate Fund on those books. Each shareholder account shall represent the
respective pro rata number of Intermediate Series shares due to such Adjustable
Rate Fund shareholder. Fractional shares of Intermediate Series will be rounded
to the third decimal place.

Accordingly, every participating shareholder of Adjustable Rate Fund will
own shares of Intermediate Series immediately after the reorganization that,
except for rounding, will be equal to the value of that shareholder's Class A or
Class B shares of Adjustable Rate Fund immediately prior to the reorganization.
Moreover, because shares of Intermediate Series will be issued at net asset
value in exchange for net assets of Adjustable Rate Fund that, except for
rounding, will equal the aggregate value of those shares, the net asset

15
<PAGE> 17

value per share of Intermediate Series will be unchanged. Thus, the
reorganization will not result in a dilution of the value of any shareholder
account. However, in general, the reorganization will substantially reduce the
percentage of ownership of each Adjustable Rate Fund shareholder below such
shareholder's current percentage of ownership of Adjustable Rate Fund because,
while such shareholder will have the same dollar amount invested initially in
Intermediate Series that he or she had invested in Adjustable Rate Fund, his or
her investment will represent a smaller percentage of the combined net assets of
Intermediate Series and Adjustable Rate Fund.

Any transfer taxes payable upon issuance of shares of Intermediate Series
in a name other than that of the registered holder of the shares on the books of
Adjustable Rate Fund as of that time shall be paid by the person to whom such
shares are to be issued as a condition of such transfer. Any reporting
responsibility of Adjustable Rate Fund will continue to be the responsibility of
Adjustable Rate Fund up to and including the Closing Date and such later date on
which Adjustable Rate Fund is liquidated.

Prior to the Closing Date, and in connection with the Special Meeting, it
is anticipated that the Trustees of the Intermediate Series will change the name
of such Fund to "Short-Intermediate Term Series."

The consummation of the proposed transaction is subject to a number of
conditions set forth in the Plan, some of which may be waived by the Board of
Directors/Trustees of the Funds. The Plan may be terminated and the proposed
transaction abandoned at any time, before or after approval by the shareholders
of Adjustable Rate Fund, prior to the Closing Date. In addition, the Plan may be
amended in any mutually agreeable manner, except that no amendment may be made
subsequent to the Meeting of shareholders of Adjustable Rate Fund that would
detrimentally affect the value of Intermediate Series' shares to be distributed.

REASONS FOR THE REORGANIZATION AND LIQUIDATION

The Board of Directors of Adjustable Rate Fund, including a majority of the
Independent Directors, has determined that the interests of Adjustable Rate Fund
shareholders will not be diluted as a result of the proposed transaction and
that the proposed transaction is in the best interests of the shareholders of
Adjustable Rate Fund. In addition, the Trustees of Intermediate Series,
including a majority of the Independent Trustees, have determined that the
interests of Intermediate Series' shareholders will not be diluted as a result
of the proposed transaction and that the proposed transaction is in the best
interests of the shareholders of Intermediate Series.

The reasons for the proposed transaction are described above under
"Synopsis -- Reasons for the Proposed Reorganization and Liquidation." The
Directors/Trustees of the Funds based their decision to approve the Plan on an
inquiry into a number of factors, including the following:

(1) the relative past growth in assets and investment performance and
future prospects of the Funds;

(2) the effect of the proposed transaction on the expense ratios of each
Fund;

(3) the costs of the reorganization, which will be paid for by each Fund
in proportion to their respective asset levels;

(4) the tax-free nature of the reorganization to the Funds and their
shareholders;

(5) the potential benefits to PMF, PMFD and PSI. See "Synopsis -- Fees
and Expenses" above; and

(6) the compatibility of the investment objectives, policies and
restrictions of the Funds.

16
<PAGE> 18

If the Plan is not approved by Adjustable Rate Fund shareholders, the
Adjustable Rate Fund Board of Directors may consider other appropriate action,
such as the liquidation of Adjustable Rate Fund or a merger or other business
combination with an investment company other than Intermediate Series.

DESCRIPTION OF SECURITIES TO BE ISSUED

Intermediate Series shares represent shares of beneficial interest with
$.01 par value per share. Shares of Intermediate Series will be issued to
Adjustable Rate Fund shareholders on the Closing Date. Each share represents an
equal and proportionate interest in Intermediate Series. Intermediate Series'
authorized capital consists of an unlimited number of full and fractional shares
of beneficial interest. Shares entitle their holders to one vote per full share
and fractional votes for fractional shares held. Each share of Intermediate
Series has equal voting, dividend and liquidation rights with other shares.

TAX CONSIDERATIONS

Prior to the Closing, Adjustable Rate Fund will receive an opinion from
Shereff, Friedman, Hoffman & Goodman, LLP to the effect that (1) the proposed
transaction described above will constitute a reorganization within the meaning
of Section 368(a)(1)(C) of the Internal Revenue Code; (2) no gain or loss will
be recognized by shareholders of Adjustable Rate Fund upon their receipt of
shares, including fractional shares, of Intermediate Series in exchange for
their shares of Adjustable Rate Fund (Internal Revenue Code Section 354(a)(1));
(3) no gain or loss will be recognized by Adjustable Rate Fund upon the transfer
of its assets to Intermediate Series in exchange solely for shares of
Intermediate Series and the assumption by Intermediate Series of Adjustable Rate
Fund's liabilities, if any, and the subsequent distribution of those shares to
its shareholders in liquidation thereof (Internal Revenue Code Sections 361(a)
and 357(a)); (4) no gain or loss will be recognized by Intermediate Series upon
the receipt of such assets in exchange solely for Intermediate Series shares and
its assumption of Adjustable Rate Fund's liabilities, if any (Internal Revenue
Code Section 1032(a)); (5) Intermediate Series' basis for the assets received
pursuant to the reorganization will be the same as the basis thereof in the
hands of Adjustable Rate Fund immediately before the reorganization, and the
holding period of those assets in the hands of Intermediate Series will include
the holding period thereof in Adjustable Rate Fund hands (Internal Revenue Code
Sections 362(b) and 1223(2)); (6) Adjustable Rate Fund shareholders' basis for
the shares of Intermediate Series to be received by them pursuant to the
reorganization will be the same as their basis for the shares of Adjustable Rate
Fund to be surrendered in exchange therefor (Internal Revenue Code Section
358(a)(1)); and (7) the holding period of the shares of Intermediate Series to
be received by the shareholders of Adjustable Rate Fund pursuant to the
reorganization will include the period during which the shares of Adjustable
Rate Fund to be surrendered in exchange therefor were held, provided the latter
shares were held as capital assets by the shareholders on the date of the
exchange (Internal Revenue Code Section 1223(1)).

CERTAIN COMPARATIVE INFORMATION ABOUT THE FUNDS

ORGANIZATION. Adjustable Rate Fund is a Maryland corporation and the
rights of its shareholders are governed by its Articles of Incorporation,
By-Laws and the Maryland General Corporation Law. Intermediate Series is a
series of Prudential Government Securities Trust, a Massachusetts business
trust, and the rights of its shareholders are governed by Prudential Government
Securities Trust's Declaration of Trust, By-Laws and Massachusetts law.

CAPITALIZATION. Adjustable Rate Fund has issued shares of common stock,
par value $.001 per share. Its Articles of Incorporation authorize it to issue
2,000,000,000 shares to be divided initially into two classes, consisting of
1,000,000,000 shares of Class A common stock and 1,000,000,000 shares of Class B
common

17
<PAGE> 19

stock. Intermediate Series has issued shares of beneficial interest, par value
$.01 per share. The Declaration of Trust of Prudential Government Securities
Trust permits the Trustees to issue an unlimited number of full and fractional
shares in separate series.

SHAREHOLDER MEETINGS AND VOTING RIGHTS. Generally, neither Fund is
required to hold annual meetings of its shareholders. Each Fund is required to
call a meeting of shareholders for the purpose of voting upon the question of
removal of a Director/Trustee when requested in writing to do so by the holders
of at least 10% of the Fund's outstanding shares. In addition, each Fund is
required to call a meeting of shareholders for the purpose of electing
Directors/Trustees if, at any time, less than a majority of the
Directors/Trustees holding office were elected by shareholders.

Shareholders of each Fund are entitled to one vote for each share on all
matters submitted to a vote of its shareholders under Maryland or Massachusetts
law, as the case may be. Approval of certain matters, such as an amendment to
the charter, a merger, consolidation or transfer of all or substantially all
assets, dissolution and removal of a director, requires the affirmative vote of
a majority of the votes entitled to be cast. Other matters require the approval
of the affirmative vote of a majority of the votes cast at a meeting at which a
quorum is present.

Each Fund's By-Laws provide that a majority of the outstanding shares shall
constitute a quorum for the transaction of business at a shareholders' meeting.
Matters requiring a larger vote by law or under the organizational documents for
each Fund are not affected by such quorum requirements.

SHAREHOLDER LIABILITY. Under Maryland law, shareholders of Adjustable Rate
Fund have no personal liability as such for Adjustable Rate Fund's acts or
obligations. Under Massachusetts law, however, shareholders of a Massachusetts
business trust could, under certain circumstances, be held personally liable for
its obligations. The Declaration of Trust relating to Intermediate Series,
however, contains an express disclaimer of liability for the acts, obligations
or affairs of Intermediate Series. The Declaration of Trust also provides for
indemnification and reimbursement of claims, liabilities and expenses incurred
by a shareholder of the Intermediate Series by reason of his having been a
shareholder.

LIABILITY AND INDEMNIFICATION OF DIRECTORS/TRUSTEES. Under Adjustable Rate
Fund's Articles of Incorporation and Maryland law, a director or officer of the
Fund is not liable to the Fund or its shareholders for monetary damages for
breach of fiduciary duty as a director or officer except to the extent such
exemption from liability or limitation thereof is not permitted by law,
including the Investment Company Act. Under the Declaration of Trust, no Trustee
or officer of the Prudential Government Securities Trust shall be liable to the
Prudential Government Securities Trust or its shareholders for any action or
failure to act except for his own bad faith, wilful misfeasance, gross
negligence or reckless disregard of his duties.

Under the Investment Company Act, a Director/Trustee may not be protected
against liability to the Fund and its security holders to which he would
otherwise be subject as a result of his willful misfeasance, bad faith or gross
negligence in the performance of his duties, or by reason of reckless disregard
of his obligations and duties. The staff of the SEC interprets the Investment
Company Act to require additional limits on indemnification of
directors/trustees and officers.

18
<PAGE> 20

PRO FORMA CAPITALIZATION AND RATIOS

The following table shows the capitalization of each Fund as of April 30,
1995 and the pro forma combined capitalization of both Funds as if the
reorganization had occurred on that date.

<TABLE>
<CAPTION>
PRO
ADJUSTABLE RATE INTERMEDIATE FORMA
FUND SERIES COMBINED
----------------- -------- --------
<S> <C> <C> <C> <C>
CLASS
CLASS A B
Net Assets (000)..................... $55,731 $ 263 $212,517 $268,511
Net Asset Value per share............ $ 9.62 $9.65 $ 9.44 $ 9.44
Shares Outstanding (000)............. 5,794 27 22,518 28,450
</TABLE>

The following table shows the ratio of expenses to average net assets and
the ratio of net investment income to average net assets of Adjustable Rate Fund
for the fiscal year ended February 28, 1995 and of Intermediate Series for the
fiscal year ended November 30, 1994. The ratios are also shown on a pro forma
combined basis, assuming the reorganization occurs on or about August 24, 1995.

<TABLE>
<CAPTION>
PRO
ADJUSTABLE RATE INTERMEDIATE FORMA
FUND SERIES COMBINED
--------------- ----- -----
<S> <C> <C> <C> <C>
CLASS CLASS
A B
Ratio of expenses to average net
assets............................ 1.07% 1.03% .84% .90%
Ratio of net investment income to
average net assets................ 3.65% 3.47% 5.48% 4.63%
</TABLE>

INFORMATION ABOUT INTERMEDIATE SERIES

FINANCIAL INFORMATION

For condensed financial information for Intermediate Series, see "Financial
Highlights" in the Intermediate Series Prospectus.

GENERAL

For a discussion of the organization, classification and sub-classification
of Intermediate Series, see "General Information" and "Trust Highlights" in the
Intermediate Series Prospectus.

INVESTMENT OBJECTIVE AND POLICIES

For a discussion of Intermediate Series' investment objective and policies
and risk factors associated with an investment in Intermediate Series, see "How
the Trust Invests" in the Intermediate Series Prospectus.

TRUSTEES

For a discussion of the responsibilities of Intermediate Series' Trustees,
see "How the Trust is Managed" in the Intermediate Series Prospectus.

MANAGER AND PORTFOLIO MANAGER

For a discussion of Intermediate Series' Manager, subadviser and portfolio
manager, see "How the Trust is Managed -- Manager" in the Intermediate Series
Prospectus.

19
<PAGE> 21

PERFORMANCE

For a discussion of Intermediate Series' performance during the fiscal year
ended November 30, 1994, see Appendix A hereto.

INTERMEDIATE SERIES' SHARES

For a discussion of Intermediate Series' shares, including voting rights
and exchange rights, and how the shares may be purchased and redeemed, see
"Shareholder Guide" and "How the Trust is Managed" in the Intermediate Series
Prospectus.

NET ASSET VALUE

For a discussion of how the offering price of Intermediate Series shares is
determined, see "How the Trust Values its Shares" in the Intermediate Series
Prospectus.

TAXES, DIVIDENDS AND DISTRIBUTIONS

For a discussion of Intermediate Series' policy with respect to dividends
and distributions and the tax consequences of an investment in Intermediate
Series shares, see "Taxes, Dividends and Distributions" in the Intermediate
Series Prospectus.

ADDITIONAL INFORMATION

Intermediate Series is subject to the informational requirements of the
Investment Company Act and in accordance therewith files reports and other
information with the Securities and Exchange Commission. Proxy material, reports
and other information filed by Intermediate Series can be inspected and copied
at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices in New
York (7 World Trade Center, Suite 1300, New York, New York 10048) and Chicago
(Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois
60661-2511). Copies of such material can be obtained at prescribed rates from
the Public Reference Branch, Office of Consumer Affairs and Information
Services, Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549.

INFORMATION ABOUT ADJUSTABLE RATE FUND

FINANCIAL INFORMATION

For condensed financial information for Adjustable Rate Fund, see
"Financial Highlights" in the Adjustable Rate Fund Prospectus.

GENERAL

For a discussion of the organization, classification and sub-classification
of Adjustable Rate Fund, see "General Information" and "Fund Highlights" in the
Adjustable Rate Fund Prospectus.

INVESTMENT OBJECTIVE AND POLICIES

For a discussion of Adjustable Rate Fund's investment objective and
policies, see "How the Fund Invests" in the Adjustable Rate Fund Prospectus.

20
<PAGE> 22

DIRECTORS

For a discussion of the responsibilities of Adjustable Rate Fund's Board of
Directors, see "How the Fund is Managed" in the Adjustable Rate Fund Prospectus.

MANAGER AND PORTFOLIO MANAGER

For a discussion of Adjustable Rate Fund's Manager, subadviser and
portfolio manager, see "How the Fund is Managed -- Manager" in the Adjustable
Rate Fund Prospectus.

PERFORMANCE

For a discussion of Adjustable Rate Fund's performance during the fiscal
year ended February 28, 1995, see the Adjustable Rate Fund Annual Report to
Shareholders for the fiscal year ended February 28, 1995, which accompanies this
Prospectus and Proxy Statement.

ADJUSTABLE RATE FUND'S SHARES

For a discussion of Adjustable Rate Fund's Class A and Class B shares,
including voting rights, exchange rights and the conversion feature of Class B
shares, and how the shares may be purchased and redeemed, see "Shareholder
Guide" and "How the Fund is Managed" in the Adjustable Rate Fund Prospectus.

NET ASSET VALUE

For a discussion of how the offering price of Adjustable Rate Fund's Class
A and Class B shares is determined, see "How the Fund Values its Shares" in the
Adjustable Rate Fund Prospectus.

TAXES, DIVIDENDS AND DISTRIBUTIONS

For a discussion of Adjustable Rate Fund's policy with respect to dividends
and distributions and the tax consequences of an investment in Class A or Class
B shares, see "Taxes, Dividends and Distributions" in the Adjustable Rate Fund
Prospectus.

ADDITIONAL INFORMATION

Additional information concerning Adjustable Rate Fund is incorporated
herein by reference from Adjustable Rate Fund's current Prospectus dated June
26, 1995, and Adjustable Rate Fund's Annual Report to Shareholders for the
fiscal year ended February 28, 1995. Copies of Adjustable Rate Fund's Prospectus
and Annual Report are available without charge upon oral or written request from
Adjustable Rate Fund. To obtain Adjustable Rate Fund's Prospectus and Annual
Report, call (800) 225-1852 or write to Prudential Mutual Fund Services, Inc.,
Raritan Plaza One, Edison, New Jersey 08837.

Reports and other information filed by Adjustable Rate Fund can be
inspected and copied at the public reference facilities maintained by the
Securities and Exchange Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the SEC's regional offices in New York (7 World
Trade Center, Suite 1300, New York, New York 10048) and Chicago (Citicorp
Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511).
Copies of such material can also be obtained at prescribed rates from the Public
Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549.

21
<PAGE> 23

VOTING INFORMATION

If the accompanying form of Proxy is executed properly and returned, shares
represented by it will be voted at the Meeting in accordance with the
instructions on the Proxy. However, if no instructions are specified, shares
will be voted for the proposal. A Proxy may be revoked at any time prior to the
time it is voted by written notice to the Secretary of Adjustable Rate Fund or
by attendance at the Meeting. If sufficient votes to approve the proposal are
not received, the persons named as proxies may propose one or more adjournments
of the Meeting to permit further solicitation of Proxies. Any such adjournment
will require the affirmative vote of a majority of those shares present at the
Meeting or represented by proxy. When voting on a proposed adjournment, the
persons named as proxies will vote for the proposed adjournment all shares that
they are entitled to vote, unless directed to disapprove the proposal, in which
case such shares will be voted against the proposed adjournment. Any questions
as to an adjournment of the Meeting will be voted on by the persons named in the
enclosed Proxy in the same manner that the Proxies are instructed to be voted.
In the event that the Meeting is adjourned, the same procedures will apply at a
later Meeting date.

If a Proxy that is properly executed and returned is accompanied by
instructions to withhold authority to vote (an abstention) or represents a
broker "non-vote" (that is, a Proxy from a broker or nominee indicating that
such person has not received instructions from the beneficial owner or other
person entitled to vote shares on a particular matter with respect to which the
broker or nominee does not have discretionary power), the shares represented
thereby, with respect to matters to be determined by a majority of the votes
cast on such matters, will be considered present for purposes of determining the
existence of a quorum for the transaction of business but, not being cast, will
have no effect on the outcome of such matters. With respect to matters requiring
the affirmative vote of a majority of the total shares outstanding, an
abstention or broker non-vote will be considered present for purposes of
determining the existence of a quorum but will have the effect of a vote against
such matters.

The close of business on May 26, 1995 has been fixed as the record date for
the determination of shareholders entitled to notice of, and to vote at, the
Meeting. On that date, Adjustable Rate Fund had 5,734,321.048 Class A shares and
21,248.955 Class B shares outstanding and entitled to vote.

Each share of Adjustable Rate Fund will be entitled to one vote at the
Meeting. It is expected that the Notice of Special Meeting, Prospectus and Proxy
Statement and form of Proxy will be mailed to shareholders on or about June 30,
1995.

As of May 26, 1995, the following shareholders owned beneficially or of
record 5% or more of Adjustable Rate Fund's outstanding Class A or Class B
shares:

As of May 26, 1995, Paul G. Allen, 110 110th Ave., NE, Suite 550, Bellevue,
Washington was the beneficial owner of 2,129,624 Class A shares (approximately
37% of the outstanding Class A shares). As of May 26, 1995, Sammy L. Clement,
2740 Kuilei Street -- Apt. 1806, Honolulu, Hawaii was the beneficial owner of
1,068 Class B shares (approximately 5% of the outstanding Class B shares), James
Woodson, Rose Boyd Co -- TTEES, Gloria Glywasky Fmly Mgt Trust UA DTD 08/17/94,
FBO Gloria Glywasky, 23 Pendale Drive, Amityville, New York was the beneficial
owner of 3,157 Class B shares (approximately 15% of the outstanding Class B
shares), Prudential Bank & Trust Co. C/F The Rollover IRA of S. Stanley Steen,
Rd. 1, Box 229, Lincoln, Delaware was the beneficial owner of 2,356 Class B
shares (approximately 11% of the outstanding Class B shares), Prudential Bank &
Trust Co. C/F The IRA of Ralph E. Butler, Sr., Rd. 1, Box 988, Harrington,
Delaware was the beneficial owner of 1,605 Class B shares (approximately 8% of
the outstanding Class B shares), Romesh Wadltwant TTEE Aspect Development 401K
DTD 01/01/92 FBO 401K Svgs and Retrm, 1240 Villa Street, Mountain View,
California was the beneficial owner of 2,237 Class B shares (approximately 11%
of the outstanding Class B shares), Prudential Securities C/F Betty Jennings IRA

22
<PAGE> 24

DTD 06/20/88, 17044 Louis Court, South Holland, Illinois was the beneficial
owner of 1,318 Class B shares (approximately 6% of the outstanding Class B
shares) and Dennis B. Markgraf, Connie D. Markgraf Co -- TTEES The Marvin H. and
Cecil G. Markgraf Living Trust UA DTD 04/11/92, 103 Pleasant Street, Granite
Falls, Minnesota was the beneficial owner of 1,735 Class B shares (approximately
8% of the outstanding Class B shares).

The expenses of reorganization and solicitation will be borne by Adjustable
Rate Fund and Intermediate Series in proportion to their respective assets and
will include reimbursement of brokerage firms and others for expenses in
forwarding proxy solicitation material to shareholders. The Board of Directors
of Adjustable Rate Fund has retained Shareholder Communications Corporation, a
proxy solicitation firm, to assist in the solicitation of proxies for the
Meeting. The fees and expenses of Shareholder Communications Corporation are not
expected to exceed $2,000, excluding mailing and printing costs. The
solicitation of Proxies will be largely by mail but may include telephonic,
telegraphic or oral communication by regular employees of Prudential Securities
and its affiliates, including Prudential Mutual Fund Management, Inc. This cost,
including specified expenses, also will be borne by Adjustable Rate Fund and
Intermediate Series in proportion to their respective assets.

OTHER MATTERS

No business other than as set forth herein is expected to come before the
Meeting, but should any other matter requiring a vote of shareholders of
Adjustable Rate Fund arise, including any question as to an adjournment of the
Meeting, the persons named in the enclosed Proxy will vote thereon according to
their best judgment in the interests of Adjustable Rate Fund, taking into
account all relevant circumstances.

SHAREHOLDERS' PROPOSALS

An Adjustable Rate Fund shareholder proposal intended to be presented at
any subsequent meeting of the shareholders of Adjustable Rate Fund must be
received by Adjustable Rate Fund a reasonable time before the Directors'
solicitation relating to such meeting is made in order to be included in
Adjustable Rate Fund's Proxy Statement and form of Proxy relating to that
meeting. In the event that the Plan is approved at this Meeting, it is not
expected that there will be any future shareholder meetings of Adjustable Rate
Fund.

It is the present intent of the Board of Directors of Adjustable Rate Fund
and of the Trustees of the Intermediate Series not to hold annual meetings of
shareholders unless the election of Directors/Trustees is required under the
Investment Company Act.

S. JANE ROSE,
Secretary

Dated: June 26, 1995

23
<PAGE> 25

APPENDIX A

PERFORMANCE OVERVIEW

LETTER TO
SHAREHOLDERS

January 16, 1995

Dear Shareholder:

Interest rates have risen dramatically over the last six months and money
market fund investors have seen their yields rise. Longer-term interest rates
have also risen, but bond prices fall as interest rates rise, so the average
intermediate-term bond fund produced negative total returns, as measured by
Lipper Analytical Services Inc. We're pleased to note that the all three Series
in the Government Securities Trust produced average returns in this market.

THE FED RAISED SHORT-TERM INTEREST RATES.

Over the last six months, the Federal Reserve Board has raised short-term
interest rates by 2.5 percentage points, in the belief that higher short-term
interest rates were necessary to moderate economic growth and keep inflation in
check. Third-quarter 1994 gross domestic product, which measures the value of
all goods produced and services delivered in the U.S., grew at an annualized
rate of 3.9%, faster than expected, and more than the 2.5% to 3% than the
Federal Reserve would like. Pessimists have argued that inflation must surely
follow even though inflation to date is within the Fed's target when measured
on an actual basis. So it continues to be the fear of rising inflation that
has spooked the markets--the prospect, but not the reality of increasing prices.

As the Federal Reserve raised short-term interest rates, inflation fears in
the bond market pushed rates on intermediate maturities higher as well. Yields
on shorter maturities rose more than yields on long maturities over the last six
months. The yield of the two-year U.S. Treasury rose to 7.3% on November 30,
from 6.0% on May 31, while the 10-year yield edged up to 7.8% from 7.2%.

[GRAPH]

A-1
<PAGE> 26

Money Market Series

The Money Market Series seeks high current income, preservation of capital
and maintenance of liquidity from a portfolio of money market instruments issued
by the U.S. Government, its agencies and instrumentalities.

MONEY MARKET SERIES PERFORMANCE
As of November 30, 1994

<TABLE>
<CAPTION>
7-Day Weighted Net Asset Total
Yield* Avg. Mat. (WAM) Value (NAV) Net Assets
<S> <C> <C> <C> <C>
Money Market Series 4.69% 42 days $1.00 $ 637.3 mil.
Donoghue's Money 4.67% 38 days $1.00 N/A
Fund Average (GVT)**
</TABLE>

*Yields will fluctuate from time to time and past performance is not
indicative of future results.

**This is the average 7-day yield, WAM and NAV of 212 funds in Donoghue's
Money Fund Average/U.S. Government Category for the week ending November 29.

An investment in the Series is neither insured nor guaranteed by the U.S.
Government and there can be no assurance that it will be able to maintain a
stable net asset value of $1.00 per share.

Money Market Yields Top 4%.

For the first time in two and half years, the Money Market Series' 7-day
yield has topped 4%. When we last reported to you on May 31, the Series' 7-day
yield was 3.18%. Our current 7-day yield of 4.69% is slightly higher than
Donoghue's U.S. Government Money Market average of 4.67%.

In this period of rising rates, the Series has shortened its weighted average
maturity (WAM) significantly from our position a year ago so we can reinvest
the proceeds from maturing notes more quickly at higher rates. In addition,
we increased our holdings in floating and variable rate instruments. The
coupons on these securities adjust periodically to reflect current interest
rates, so they help enhance yield when rates rise.

The floating rate notes we purchase are based on a money market index such
as LIBOR (London Interbank Offered Rate), the 3-month U.S. Treasury bill, or
the federal funds rate. These securities pay the quoted index rate plus a
specified margin, and the rate resets at a specified time period, such as
daily, weekly or monthly.

The Series held its WAM fairly steady, ending at 42 days on November 30,
compared to 39 days on May 31 and 64 days on November 30, 1993. In addition, we
increased our holdings in floating and variable rate instruments to 25% of
assets from 21% on May 31.

A-2

<PAGE> 27

U.S. Treasury Money Market Series

The U.S. Treasury Money Market Series seeks high current income consistent
with preservation of capital and maintenance of liquidity from a portfolio of
U.S. Treasury obligations with maturities of 13 months or less. During the
last six months, the U.S. Treasury Money Market Series produced yields
competitive with the Donoghue Government Money Fund Averages.

U.S. TREASURY MONEY MARKET SERIES PERFORMANCE
As of November 30, 1994
<TABLE>
<CAPTION>
7-Day Weighted Net Asset Total
Yield* Avg. Mat. (WAM) Value (NAV) Net Assets
<S> <C> <C> <C> <C>
U.S. Treasury Series 4.64% 45 days $1.00 $294.0 mil.
Donoghue's Money 4.50% 46 days $1.00 N/A
Fund Averages (TR)**
</TABLE>

* Yields will fluctuate from time to time and past performance is not
indicative of future results.

**This is the average 7-day yield, WAM and NAV of 37 funds in Donoghue's
100% U.S. Treasury Money Fund Average.

An investment in the Series is neither insured nor guaranteed by the U.S.
government and there can be no assurance that it will be able to maintain a
stable net asset value of $1.00 per share.

Managing Maturity As Interest Rates Rise.

When we last reported to you, our 7-day yield was 3.20%. On November 30,
the 7-day yield was 4.64%, outperforming Donoghue's 100% U.S. Treasury Money
Fund Average of 4.50%.

At the beginning of our reporting period, on May 31, we held a 51-day WAM,
slightly longer than our peers. At the time, we wanted to lock in interest rates
that the Federal Reserve had increased on May 17. Since then, we have shortened
WAM to 45 days, so we could reinvest the proceeds from maturing notes more
quickly at higher rates.

Tax Update-Intermediate Term Series

Of the 4.5 cents declared as accumulated net investment income in December
1994, 4 cents was derived from net investment income and 0.5 cents was derived
from paid-in capital. In addition, we believe approximately 17% of the
distributions paid in 1994 will constitute a ``return of capital,'' which is
not subject to taxation as ordinary income.

Intermediate-Term Series

The Intermediate-Term Series seeks high income consistent with providing
reasonable safety of principal by investing primarily in a diversified portfolio
of securities issued by the U.S. government, its agencies or instrumentalities.

The Series' net asset value (NAV) fell to $9.17 on November 30 from $9.47 on
May 31. At the same time, the Series' 30-day SEC yield rose above 6% for the
first time since September, 1991. On May 31, the Series' 30-day SEC yield was
4.79%. On November 30, the yield was 6.52%.

A-3

<PAGE> 28

INTERMEDIATE-TERM SERIES
CUMULATIVE TOTAL RETURN
As of November 30, 1994*
<TABLE>
<CAPTION>

One Year Five Year Ten Year Since 9/22/82
<S> <C> <C> <C> <C>
Intermediate -2.6% 35.6% 120.3% 173.0%
Term Series
Lipper Inter. -3.7% 37.0% 122.5% 168.1%
US Gvt Bond
Fund Average**
</TABLE>

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
As of December 31, 1994*

One Year Five Year Ten Year Since 9/22/82
<S> <C> <C> <C> <C>
Intermediate -2.4% 6.4% 8.1% 8.6%
Term Series
</TABLE>

Past performance is no guarantee of future results. Investment return and
principal will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.

* Source: Prudential Mutual Fund Management Inc. Shares of this Series are
sold without an initial or contingent deferred sales charge.

**These are the average returns of 88 funds in the Intermediate U.S.
Government Bond Fund category for six months, 73 funds for one year, 20 funds
for five years, 5 funds for 10 years, and 3 funds since inception on 9/22/82,
as determined by Lipper Analytical Services, Inc.

More Mortgages.

To counter the negative effect of rising interest rates on bond prices, we
adopted a defensive posture by increasing exposure to mortgage-backed securities
to 30% of assets from 12%. Mortgages tend to be less volatile than U.S.
Treasurys as interest rates rise, because they generally have higher coupons.
In addition, the risk these will be prepaid declines since homeowners have no
incentive to prepay their mortgages. (Prepayment risk is important because a
security is less valuable if it matures earlier than anticipated.) Following
this strategy, we sold approximately $50 million in U.S. Treasury notes with
maturities ranging from five to ten years and reinvested the proceeds in Ginnie
Mae adjustable rate mortgages and seven-year Fannie Mae balloon mortgages.

As a result of increasing our holdings in mortgages, turnover in the
portfolio increased this year. When David Graham started to manage the fund in
November 1993, he began to add mortgage-backed securities to the portfolio.
Until then, the portfolio contained primarily U.S. Treasurys and government
agencies. During the 12-month period, David invested as much as 30% of assets
in U.S. mortgage-backed securities to increase the series' yield and enhance
value during a turbulent interest rate environment. Mortgages outperformed
both Treasurys and agencies during the period, as measured by Lehman Brothers.

A-4

<PAGE> 29

We also shifted assets to shorter-term maturities to take advantage of
rapidly rising interest rates in this maturity range. For example, the
percentage of assets in the one -- to three-year maturity range rose to 50%
from 32% while assets held in the three -- to five-year maturity range fell to
15% from 45%.

The Outlook.

The economy probably has not yet slowed sufficiently to prevent the threat
of rising inflation. We expect the Federal Reserve to increase short-term
interest rates at least one more time before its job is done, and will continue
to manage our portfolios to maximize yield and preserve value to the degree
dictated by each of the individual Series' objectives.

Thank you for the confidence you have shown in us by choosing the Prudential
Government Securities Trust for your government securities investment.

Sincerely,

Lawrence C. McQuade
President

Bernard D. Whitsett II
Portfolio Manager
Money Market Series
U.S. Treasury Money Market Series

David Graham
Portfolio
Manager
Intermediate-Term Series

A-5

<PAGE> 30

PRUDENTIAL GOVERNMENT SECURITIES TRUST: INTERMEDIATE TERM SERIES

COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN PRUDENTIAL GOVERNMENT
SECURITIES TRUST: INTERMEDIATE TERM SERIES AND THE LEHMAN INTERMEDIATE
GOVERNMENT BOND INDEX

[FUND LBGI CHART]

Past performance is not predictive of future performance and an
investor's shares may be worth more or less than their original cost.

This graph is furnished to you in accordance with SEC regulations. It
compares a $10,000 investment in Prudential Government Securities Trust:
Intermediate Term Series with a similar investment in the Lehman Brothers
Intermediate Government Bond Index (LBGI) by portraying the initial account
value on December 1, 1984 and subsequent account values at the end of each
fiscal year (November 30), as measured on a quarterly basis. For purposes of
the graph and, unless otherwise indicated, the accompanying table, it has been
assumed that all recurring fees (including management fees) were deducted and
all dividends and distributions were reinvested.

The LBGI is a weighted index comprised of securities issued or backed
by the U.S. government, its agencies and instrumentalities with a remaining
maturity of one to ten years. The LBGI is an unmanaged Index and includes the
reinvestment of all dividends, but does not reflect the payment of transaction
costs and advisory fees associated with an investment in the Fund. The
securities that comprise the LBGI may differ substantially from the securities
in the Fund's portfolio. The LBGI is not the only index that may be used to
characterize performance of intermediate-term bond funds and other indices may
portray different comparative performance.

A-6
<PAGE> 31

APPENDIX B

FORM OF
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION

Agreement and Plan of Reorganization and Liquidation (Agreement) made as of
the th day of , 1995, by and between Prudential Adjustable Rate
Securities Fund, Inc. (Adjustable Rate Fund) and Prudential Government
Securities Trust (Government Securities Trust) (collectively, the Funds and each
individually, a Fund). Adjustable Rate Fund is a corporation organized under the
laws of the State of Maryland and maintains its principal place of business at
One Seaport Plaza, New York, New York 10292. Government Securities Trust is a
Massachusetts business trust and maintains its principal place of business at
One Seaport Plaza, New York, New York 10292. Shares of Adjustable Rate Fund are
divided into two classes, designated Class A and Class B. Government Securities
Trust consists of three portfolios, the Intermediate Term Series (Intermediate
Series) being the portfolio into which the assets of Adjustable Rate Fund are
proposed to be transferred.

This Agreement is intended to be, and is adopted as, a plan of
reorganization pursuant to Section 368(a)(1)(C) of the Internal Revenue Code of
1986, as amended (Internal Revenue Code). The reorganization will comprise the
transfer of all of the assets of Adjustable Rate Fund, in exchange solely for
shares of beneficial interest of the Intermediate Series and Intermediate
Series' assumption of Adjustable Rate Fund's liabilities, if any, and the
constructive distribution, after the Closing Date hereinafter referred to, of
such shares of the Intermediate Series to the shareholders of Adjustable Rate
Fund in liquidation of Adjustable Rate Fund as provided herein, all upon the
terms and conditions as hereinafter set forth.

In consideration of the premises and of the covenants and agreements set
forth herein, the parties covenant and agree as follows:

1. Transfer of Assets of Adjustable Rate Fund in Exchange for Shares of the
Intermediate Series and Assumption of Liabilities, if any, and Liquidation of
Adjustable Rate Fund.

1.1 Subject to the terms and conditions herein set forth and on the
basis of the representations and warranties contained herein, Adjustable
Rate Fund agrees to sell, assign, transfer and deliver its assets, as set
forth in paragraph 1.2, to Intermediate Series, and Government Securities
Trust, on behalf of Intermediate Series, agrees (a) to issue and deliver to
Adjustable Rate Fund in exchange thereof the number of shares in
Intermediate Series determined by dividing the net asset value of
Adjustable Rate Fund allocable to shares of Class A and Class B Common
Stock (computed in the manner and as of the time and date set forth in
paragraph 2.2) by the net asset value allocable to a share of the
Intermediate Series (computed in the manner and as of the time and date set
forth in paragraph 2.2); and (b) to assume all of Adjustable Rate Fund's
liabilities, if any, as set forth in paragraph 1.3. Such transactions shall
take place at the closing provided for in paragraph 3 (Closing).

1.2 The assets of Adjustable Rate Fund to be acquired by Intermediate
Series shall include without limitation all cash, cash equivalents,
securities, receivables (including interest and dividends receivable) and
other property of any kind owned by Adjustable Rate Fund and any deferred
or prepaid expenses shown as assets on the books of Adjustable Rate Fund on
the closing date provided in paragraph 3 (Closing Date). Government
Securities Trust has no plan or intent to sell or otherwise dispose of any
assets of Adjustable Rate Fund.

1.3 Except as otherwise provided herein, Intermediate Series will
assume from Adjustable Rate Fund all debts, liabilities, obligations and
duties of Adjustable Rate Fund of whatever kind or nature,

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whether absolute, accrued, contingent or otherwise, whether or not
determinable as of the Closing Date and whether or not specifically
referred to in this Agreement; provided, however, that Adjustable Rate Fund
agrees to utilize its best efforts to discharge all of its known debts,
liabilities, obligations and duties prior to the Closing Date.

1.4 On or immediately prior to the Closing Date, Adjustable Rate Fund
will declare and pay to its shareholders of record dividends and/or other
distributions so that it will have distributed substantially all (and in
any event not less than ninety-eight percent) of its investment company
taxable income (computed without regard to any deduction for dividends
paid), net tax-exempt interest income, if any, and realized net capital
gains, if any, for all taxable years through its liquidation.

1.5 On a date (Liquidation Date), as soon after the Closing Date as is
conveniently practicable, Adjustable Rate Fund will file Articles of
Dissolution with the State Department of Assessment and Taxation of the
State of Maryland and distribute pro rata to its Class A and Class B
shareholders of record, determined as of the close of business on the
Closing Date, the shares of Intermediate Series, respectively, received by
Adjustable Rate Fund pursuant to paragraph 1.1 in exchange for their
interest in Adjustable Rate Fund. Such distribution will be accomplished by
opening accounts on the books of the Intermediate Series in the names of
Adjustable Rate Fund shareholders and transferring thereto the shares
credited to the account of Adjustable Rate Fund on the books of
Intermediate Series. Each account opened shall be credited with the
respective pro rata number of Intermediate Series due each Adjustable Rate
Class A and Class B shareholder, respectively. Fractional shares of
Intermediate Series shall be rounded to the third decimal place.

1.6 The Intermediate Series shall not issue certificates representing
its shares in connection with such exchange. With respect to any Adjustable
Rate Fund shareholder holding Adjustable Rate Fund stock certificates as of
the Closing Date, until Intermediate Series is notified by Adjustable Rate
Fund's transfer agent that such shareholder has surrendered his or her
outstanding Adjustable Rate Fund stock certificates or, in the event of
lost, stolen or destroyed stock certificates, posted adequate bond or
submitted a lost certificate form, as the case may be, Intermediate Series
will not permit such shareholder to (1) receive dividends or other
distributions on Intermediate Series shares in cash (although such
dividends and distributions shall be credited to the account of such
shareholder established on Intermediate Series' books pursuant to paragraph
1.5, as provided in the next sentence), (2) exchange Intermediate Series
shares credited to such shareholder's account for shares of other
Prudential Mutual Funds, or (3) pledge or redeem such shares. In the event
that a shareholder is not permitted to receive dividends or other
distributions on Intermediate Series shares in cash as provided in the
preceding sentence, the Intermediate Series shall pay such dividends or
other distributions in additional Intermediate Series shares,
notwithstanding any election such shareholder shall have made previously
with respect to the payment of dividends or other distributions on shares
of Adjustable Rate Fund. Adjustable Rate Fund will, at its expense, request
its shareholders to surrender their outstanding Adjustable Rate Fund stock
certificates, post adequate bond or submit a lost certificate form, as the
case may be.

1.7 Ownership of the Intermediate Series shares will be shown on the
books of Government Securities Trust's transfer agent. Shares of
Intermediate Series will be issued in the manner described in Intermediate
Series' then-current prospectus and Government Securities Trust's
then-current statement of additional information.

1.8 Any transfer taxes payable upon issuance of shares of the
Intermediate Series in a name other than the registered holder of the
shares on the books of Adjustable Rate Fund as of that time shall be paid
by the person to whom such shares are to be issued as a condition to the
registration of such transfer.

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1.9 Any reporting responsibility with the Securities and Exchange
Commission or any state securities commission of Adjustable Rate Fund is
and shall remain the responsibility of Adjustable Rate Fund up to and
including the Liquidation Date.

1.10 All books and records of Adjustable Rate Fund, including all
books and records required to be maintained under the Investment Company
Act of 1940 (Investment Company Act) and the rules and regulations
thereunder, shall be available to Intermediate Series from and after the
Closing Date and shall be turned over to Government Securities Trust on or
prior to the Liquidation Date.

2. Valuation

2.1 The value of Adjustable Rate Fund's assets and liabilities to be
acquired and assumed, respectively, by Intermediate Series shall be the net
asset value computed as of 4:15 p.m., New York time, on the Closing Date
(such time and date being hereinafter called the Valuation Time), using the
valuation procedures set forth in Adjustable Rate Fund's then-current
prospectus and statement of additional information.

2.2 The net asset value of a share of the Intermediate Series shall be
the net asset value per such share computed as of the Valuation Time, using
the valuation procedures set forth in Intermediate Series' then-current
prospectus and Government Securities Trust's then-current statement of
additional information.

2.3 The number of Intermediate Series shares to be issued (including
fractional shares, if any) in exchange for Adjustable Rate Fund's net
assets shall be calculated as set forth in paragraph 1.1.

2.4 All computations of net asset value shall be made by or under the
direction of Prudential Mutual Fund Management, Inc. (PMF) in accordance
with its regular practice as manager of the Funds.

3. Closing and Closing Date

3.1 Except as provided in Section 3.3, the Closing Date shall be
August 24, 1995; or such later date as the parties may agree in writing.
All acts taking place at the Closing shall be deemed to take place
simultaneously as of the close of business on the Closing Date unless
otherwise provided. The Closing shall be at the office of Government
Securities Trust or at such other place as the parties may agree.

3.2 State Street Bank and Trust Company (State Street), as custodian
for Adjustable Rate Fund, shall deliver to Government Securities Trust at
the Closing a certificate of an authorized officer of State Street stating
that (a) Adjustable Rate Fund's portfolio securities, cash and any other
assets have been transferred in proper form to Government Securities Trust
on the Closing Date and (b) all necessary taxes, if any, have been paid, or
provision for payment has been made, in conjunction with the transfer of
portfolio securities.

3.3 In the event that immediately prior to the Valuation Time (a) the
New York Stock Exchange (NYSE) or other primary exchange is closed to
trading (other than prior to, or following the close of, trading on such
exchange on a regular business day) or trading thereon is restricted or (b)
trading or the reporting of trading on the NYSE or other primary exchange
or elsewhere is disrupted so that accurate appraisal of the value of the
net assets of Adjustable Rate Fund and of the net asset value per share of
Intermediate Series is impracticable, the Closing Date shall be postponed
until the first business day after the date when such trading shall have
been fully resumed and such reporting shall have been restored.

3.4 Adjustable Rate Fund shall deliver to Government Securities Trust
on or prior to the Liquidation Date the names and addresses of its
shareholders and the number of outstanding shares owned by each such
shareholder, all as of the close of business on the Closing Date, certified
by the

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Secretary or Assistant Secretary of Adjustable Rate Fund. Government
Securities Trust shall issue and deliver to Adjustable Rate Fund at the
Closing a confirmation or other evidence satisfactory to Adjustable Rate
Fund that shares of the Intermediate Series have been or will be credited
to Adjustable Rate Fund's account on the books of the Intermediate Series.
At the Closing each party shall deliver to the other such bills of sale,
checks, assignments, share certificates, receipts and other documents as
such other party or its counsel may reasonably request to effect the
transactions contemplated by this Agreement.

4. Representations and Warranties

4.1 Adjustable Rate Fund represents and warrants as follows:

4.1.1 Adjustable Rate Fund is a corporation duly organized and
validly existing under the laws of the State of Maryland;

4.1.2 Adjustable Rate Fund is an open-end management investment
company duly registered under the Investment Company Act, and such
registration is in full force and effect;

4.1.3 Adjustable Rate Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of any
provision of the Articles of Incorporation or By-Laws of Adjustable Rate
Fund or of any material agreement, indenture, instrument, contract,
lease or other undertaking to which Adjustable Rate Fund is a party or
by which Adjustable Rate Fund is bound;

4.1.4 All material contracts or other commitments of Adjustable
Rate Fund except this Agreement will be terminated on or prior to the
Closing Date without Adjustable Rate Fund or Government Securities Trust
incurring any liability or penalty with respect thereto;

4.1.5 No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against Adjustable Rate Fund or
any of its properties or assets. Adjustable Rate Fund knows of no facts
that might form the basis for the institution of such proceedings, and
Adjustable Rate Fund is not a party to or subject to the provisions of
any order, decree or judgment of any court or governmental body that
materially and adversely affects its business or its ability to
consummate the transactions herein contemplated;

4.1.6 The Portfolio of Investments, Statement of Assets and
Liabilities, Statement of Operations, Statement of Changes in Net
Assets, and Financial Highlights of Adjustable Rate Fund at February 28,
1995 and for the year then ended (copies of which have been furnished to
Government Securities Trust) have been audited by Deloitte & Touche LLP,
independent accountants, in accordance with generally accepted auditing
standards. Such financial statements are prepared in accordance with
generally accepted accounting principles and present fairly, in all
material respects, the financial condition, results of operations,
changes in net assets and financial highlights of Adjustable Rate Fund
as of and for the period ended on such date, and there are no material
known liabilities of Adjustable Rate Fund (contingent or otherwise) not
disclosed therein;

4.1.7 Since February 28, 1995, there has not been any material
adverse change in Adjustable Rate Fund's financial condition, assets,
liabilities or business other than changes occurring in the ordinary
course of business, or any incurrence by Adjustable Rate Fund of
indebtedness maturing more than one year from the date such indebtedness
was incurred, except as otherwise disclosed to and accepted by
Government Securities Trust. For the purposes of this paragraph 4.1.7, a
decline in net asset value, net asset value per share or change in the
number of shares outstanding shall not constitute a material adverse
change;

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4.1.8 At the date hereof and at the Closing Date, all federal and
other tax returns and reports of Adjustable Rate Fund required by law to
have been filed on or before such dates shall have been timely filed,
and all federal and other taxes shown as due on said returns and reports
shall have been paid insofar as due, or provision shall have been made
for the payment thereof, and, to the best of Adjustable Rate Fund's
knowledge, all federal or other taxes required to be shown on any such
return or report have been shown on such return or report, no such
return is currently under audit and no assessment has been asserted with
respect to such returns;

4.1.9 For each past taxable year since it commenced operations,
Adjustable Rate Fund has met the requirements of Subchapter M of the
Internal Revenue Code for qualification and treatment as a regulated
investment company and intends to meet those requirements for the
current taxable year; and, for each past calendar year since it
commenced operations, Adjustable Rate Fund has made such distributions
as are necessary to avoid the imposition of federal excise tax or has
paid or provided for the payment of any excise tax imposed;

4.1.10 All issued and outstanding shares of Adjustable Rate Fund
are, and at the Closing Date will be, duly and validly authorized,
issued and outstanding, fully paid and non-assessable. All issued and
outstanding shares of Adjustable Rate Fund will, at the time of the
Closing, be held in the name of the persons and in the amounts set forth
in the list of shareholders submitted to Intermediate Series in
accordance with the provisions of paragraph 3.4. Adjustable Rate Fund
does not have outstanding any options, warrants or other rights to
subscribe for or purchase any of its shares, nor is there outstanding
any security convertible into any of its shares, except for the Class B
shares which have the conversion feature described in Adjustable Rate
Fund's current prospectus;

4.1.11 At the Closing Date, Adjustable Rate Fund will have good and
marketable title to its assets to be transferred to Intermediate Series
pursuant to paragraph 1.1, and full right, power and authority to sell,
assign, transfer and deliver such assets hereunder free of any liens,
claims, charges or other encumbrances, and, upon delivery and payment
for such assets, Intermediate Series will acquire good and marketable
title thereto;

4.1.12 The execution, delivery and performance of this Agreement
has been duly authorized by the Board of Directors of Adjustable Rate
Fund and by all necessary corporate action, other than shareholder
approval, on the part of Adjustable Rate Fund, and this Agreement
constitutes a valid and binding obligation of Adjustable Rate Fund,
subject to shareholder approval;

4.1.13 The information furnished and to be furnished by Adjustable
Rate Fund for use in applications for orders, registration statements,
proxy materials and other documents that may be necessary in connection
with the transactions contemplated hereby is and shall be accurate and
complete in all material respects and is in compliance and shall comply
in all material respects with applicable federal securities and other
laws and regulations; and

4.1.14 On the effective date of the registration statement filed
with the Securities and Exchange Commission (SEC) by Government
Securities Trust on Form N-14 relating to the shares of the Intermediate
Series issuable hereunder, and any supplement or amendment thereto
(Registration Statement), at the time of the meeting of the shareholders
of Adjustable Rate Fund and on the Closing Date, the Proxy Statement of
Adjustable Rate Fund, the Prospectus of the Intermediate Series and the
Statements of Additional Information of both Funds to be included in the
Registration Statement (collectively, Proxy Statement) (i) will comply
in all material respects with the provisions and regulations of the
Securities Act of 1933 (1933 Act), Securities Exchange Act of 1934 (1934
Act) and the Investment Company Act and the rules and regulations
thereunder and

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(ii) will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein in light of the
circumstances under which they were made or necessary to make the
statements therein not misleading; provided, however, that the
representations and warranties in this paragraph 4.1.14 shall not apply
to statements in or omissions from the Proxy Statement and Registration
Statement made in reliance upon and in conformity with information
furnished by Government Securities Trust for use therein.

4.2 Government Securities Trust represents and warrants as follows:

4.2.1 Government Securities Trust is a business trust duly
organized and validly existing under the laws of the State of
Massachusetts; and the Intermediate Series has been duly established in
accordance with the terms of the Intermediate Series' Declaration of
Trust as a separate Series of Government Securities Trust;

4.2.2 Government Securities Trust is an open-end management
investment company duly registered under the Investment Company Act, and
such registration is in full force and effect;

4.2.3 Government Securities Trust is not, and the execution,
delivery and performance of this Agreement will not result, in violation
of any provision of its Declaration of Trust or By-Laws or of any
material agreement, indenture, instrument, contract, lease or other
undertaking to which Government Securities Trust is a party or by which
Government Securities Trust is bound;

4.2.4 No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or threatened against Government Securities Trust or any of its
properties or assets, except as previously disclosed in writing to
Adjustable Rate Fund. Government Securities Trust knows of no facts that
might form the basis for the institution of such proceedings, and
Government Securities Trust is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental
body that materially and adversely affects its business or its ability
to consummate the transactions herein contemplated;

4.2.5 The Portfolio of Investments, Statement of Assets and
Liabilities, Statement of Operations, Statement of Changes in Net
Assets, and Financial Highlights of the Intermediate Series at November
30, 1994 and for the fiscal year then ended (copies of which have been
furnished to Adjustable Rate Fund) have been audited by Price Waterhouse
LLP, independent accountants, in accordance with generally accepted
auditing standards. Such financial statements are prepared in accordance
with generally accepted accounting principles and present fairly, in all
material respects, the financial condition, results of operations,
changes in net assets and financial highlights of Intermediate Series as
of and for the period ended on such date, and there are no material
known liabilities of Intermediate Series (contingent or otherwise) not
disclosed therein;

4.2.6 Since November 30, 1994, there has not been any material
adverse change in the Intermediate Series financial condition, assets,
liabilities or business other than changes occurring in the ordinary
course of business, or any incurrence by Intermediate Series of
indebtedness maturing more than one year from the date such indebtedness
was incurred, except as otherwise disclosed to and accepted by
Adjustable Rate Fund. For the purposes of this paragraph 4.2.6, a
decline in net asset value per share or a decrease in the number of
shares outstanding shall not constitute a material adverse change;

4.2.7 At the date hereof and at the Closing Date, all federal and
other tax returns and reports of Government Securities Trust required by
law to have been filed on or before such dates shall have been filed,
and all federal and other taxes shown as due on said returns and reports
shall have been

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paid insofar as due, or provision shall have been made for the payment
thereof, and, to the best of Government Securities Trust's knowledge,
all federal or other taxes required to be shown on any such return or
report are shown on such return or report, no such return is currently
under audit and no assessment has been asserted with respect to such
returns;

4.2.8 For each past taxable year since it commenced operations, the
Intermediate Series has met the requirements of Subchapter M of the
Internal Revenue Code for qualification and treatment as a regulated
investment company and intends to meet those requirements for the
current taxable year; and, for each past calendar year since it
commenced operations, Intermediate Series has made such distributions as
are necessary to avoid the imposition of federal excise tax or has paid
or provided for the payment of any excise tax imposed;

4.2.9 All issued and outstanding shares of the Intermediate Series
are, and at the Closing Date will be, duly and validly authorized,
issued and outstanding, fully paid and non-assessable. Except as
contemplated by this Agreement, the Intermediate Series does not have
outstanding any options, warrants or other rights to subscribe for or
purchase any of its shares nor is there outstanding any security
convertible into any of its shares;

4.2.10 The execution, delivery and performance of this Agreement
has been duly authorized by the Trustees of Government Securities Trust
and by all necessary corporate action on the part of Government
Securities Trust, and this Agreement constitutes a valid and binding
obligation of Government Securities Trust;

4.2.11 The shares of Intermediate Series to be issued and delivered
to Adjustable Rate Fund pursuant to this Agreement will, at the Closing
Date, have been duly authorized and, when issued and delivered as
provided in this Agreement, will be duly and validly issued and
outstanding shares of Intermediate Series, fully paid and
non-assessable;

4.2.12 The information furnished and to be furnished by Government
Securities Trust for use in applications for orders, registration
statements, proxy materials and other documents which may be necessary
in connection with the transactions contemplated hereby is and shall be
accurate and complete in all material respects and is and shall comply
in all material respects with applicable federal securities and other
laws and regulations; and

4.2.13 On the effective date of the Registration Statement, at the
time of the meeting of the shareholders of Adjustable Rate Fund and on
the Closing Date, the Proxy Statement and the Registration Statement (i)
will comply in all material respects with the provisions of the 1933
Act, the 1934 Act and the Investment Company Act and the rules and
regulations under such Acts, (ii) will not contain any untrue statement
of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading and (iii) with respect to the Registration Statement, at the
time it becomes effective, it will not contain an untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein in the light of the circumstances under which they
were made, not misleading; provided, however, that the representations
and warranties in this paragraph 4.2.13 shall not apply to statements in
or omissions from the Proxy Statement and the Registration Statement
made in reliance upon and in conformity with information furnished by
Adjustable Rate Fund for use therein.

5. Covenants of Government Securities Trust and Adjustable Rate Fund

5.1 Adjustable Rate Fund and Government Securities Trust each
covenants to operate its respective business in the ordinary course between
the date hereof and the Closing Date, it being understood that

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the ordinary course of business will include declaring and paying customary
dividends and other distributions and such changes in operations as are
contemplated by the normal operations of the Funds, except as may otherwise
be required by paragraph 1.4 hereof.

5.2 Adjustable Rate Fund covenants to call a shareholders' meeting to
consider and act upon this Agreement and to take all other action necessary
to obtain approval of the transactions contemplated hereby (including the
determinations of its Board of Directors as set forth in Rule 17a-8(a)
under the Investment Company Act).

5.3 Adjustable Rate Fund covenants that the Intermediate Series shares
to be received by Adjustable Rate Fund in accordance herewith are not being
acquired for the purpose of making any distribution thereof other than in
accordance with the terms of this Agreement.

5.4 Adjustable Rate Fund covenants that it will assist Government
Securities Trust in obtaining such information as Government Securities
Trust reasonably requests concerning the beneficial ownership of Adjustable
Rate Fund's shares.

5.5 Subject to the provisions of this Agreement, each Fund will take,
or cause to be taken, all action, and will do, or cause to be done, all
things, reasonably necessary, proper or advisable to consummate and make
effective the transactions contemplated by this Agreement.

5.6 Adjustable Rate Fund covenants to prepare the Proxy Statement in
compliance with the 1934 Act, the Investment Company Act and the rules and
regulations under each Act.

5.7 Adjustable Rate Fund covenants that it will, from time to time, as
and when requested by Government Securities Trust, execute and deliver or
cause to be executed and delivered all such assignments and other
instruments, and will take or cause to be taken such further action, as
Government Securities Trust may deem necessary or desirable in order to
vest in and confirm to Government Securities Trust title to and possession
of all the assets of Adjustable Rate Fund to be sold, assigned, transferred
and delivered hereunder and otherwise to carry out the intent and purpose
of this Agreement.

5.8 Government Securities Trust covenants to use all reasonable
efforts to obtain the approvals and authorizations required by the 1933
Act, the Investment Company Act (including the determinations of its
Trustees as set forth in Rule 17a-8(a) thereunder) and such of the state
Blue Sky or securities laws as it may deem appropriate in order to continue
its operations after the Closing Date.

5.9 Government Securities Trust covenants that it will, from time to
time, as and when requested by Adjustable Rate Fund, execute and deliver or
cause to be executed and delivered all such assignments and other
instruments, and will take and cause to be taken such further action, as
Adjustable Rate Fund may deem necessary or desirable in order to (i) vest
in and confirm to Adjustable Rate Fund title to and possession of all the
shares of the Intermediate Series to be transferred to Adjustable Rate Fund
pursuant to this Agreement and (ii) assume all of Adjustable Rate Fund's
liabilities in accordance with this Agreement.

6. Conditions Precedent to Obligations of Adjustable Rate Fund

The obligations of Adjustable Rate Fund to consummate the transactions
provided for herein shall be subject to the performance by Government Securities
Trust of all the obligations to be performed by it hereunder on or before the
Closing Date and the following further conditions:

6.1 All representations and warranties of Government Securities Trust
contained in this Agreement shall be true and correct in all material
respects as of the date hereof and, except as they may be affected

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by the transactions contemplated by this Agreement, as of the Closing Date
with the same force and effect as if made on and as of the Closing Date.

6.2 Government Securities Trust shall have delivered to Adjustable
Rate Fund on the Closing Date a certificate executed in its name by the
President or a Vice President of Government Securities Trust, in form and
substance satisfactory to Adjustable Rate Fund and dated as of the Closing
Date, to the effect that the representations and warranties of Government
Securities Trust in this Agreement are true and correct at and as of the
Closing Date, except as they may be affected by the transactions
contemplated by this Agreement, and as to such other matters as Adjustable
Rate Fund shall reasonably request.

6.3 Adjustable Rate Fund shall have received on the Closing Date a
favorable opinion from Sullivan & Cromwell, counsel to Government
Securities Trust, dated as of the Closing Date, to the effect that:

6.3.1 Government Securities Trust is duly organized and validly
existing as a Massachusetts business trust, with power under its
Declaration of Trust to own all of its properties and assets and, to the
knowledge of such counsel, to carry on its business as presently
conducted;

6.3.2 This Agreement has been duly authorized, executed and
delivered by Government Securities Trust and, assuming due
authorization, execution and delivery of the Agreement by Adjustable
Rate Fund, is a valid and binding obligation of Government Securities
Trust enforceable in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar
laws of general applicability relating to or affecting creditors' rights
and to general equity principles (regardless of whether enforcement is
sought in a proceeding at law or in equity), and further subject to the
qualifications set forth in the next succeeding sentence. Such counsel
may state that they express no opinion as to the validity or
enforceability of any provision regarding choice of New York Law to
govern this Agreement;

6.3.3 The shares of the Intermediate Series to be distributed to
Adjustable Rate Fund shareholders under this Agreement, assuming their
due authorization and delivery as contemplated by this Agreement, will
be validly issued and outstanding and fully paid and non-assessable, and
no shareholder of Government Securities Trust has any pre-emptive right
to subscribe therefor or purchase such shares;

6.3.4 The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, (i)
conflict with Government Securities Trust's Declaration of Trust or
By-Laws or (ii) result in a default or a breach of (a) the Management
Agreement dated August 9, 1988 between Government Securities Trust and
Prudential Mutual Fund Management, Inc., (b) the Custodian Contract
dated July 26, 1990 between Government Securities Trust and State Street
Bank and Trust Company, (c) the Distribution Agreement with respect to
the Intermediate Series dated July 23, 1982, as amended and restated on
July 1, 1993 between Government Securities Trust and Prudential Mutual
Fund Distributors, Inc., and (d) the Transfer Agency and Service
Agreement dated January 1, 1988; provided, however, that such counsel
may state that they express no opinion in their opinion pursuant to this
paragraph 6.3.4 with respect to federal or state securities laws, other
antifraud laws and fraudulent transfer laws; provided further that
insofar as performance by Government Securities Trust of its obligations
under this Agreement is concerned, such counsel may state that they
express no opinion as to bankruptcy, insolvency, reorganization,
moratorium and similar laws of general applicability relating to or
affecting creditors' rights;

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6.3.5 To the knowledge of such counsel, no consent, approval,
authorization, filing or order of any court or governmental authority is
required for the consummation by Government Securities Trust of the
transactions contemplated herein, except such as have been obtained
under the 1933 Act, the 1934 Act and the Investment Company Act and such
as may be required under state Blue Sky or securities laws;

6.3.6 Government Securities Trust has been registered with the SEC
as an investment company, and, to the knowledge of such counsel, no
order has been issued or proceeding instituted to suspend such
registration; and

6.3.7 To the knowledge of such counsel, (a) no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened against Government
Securities Trust or any of its properties or assets, and (b) Government
Securities Trust is not a party to or subject to the provision of any
order, decree or judgment of any court or governmental body, which
materially and adversely affects its business, except as otherwise
disclosed.

In rendering such opinion, such counsel may state that insofar as such
opinion involves factual matters, they have relied, to the extent they deem
proper, upon certificates of officers of Government Securities Trust and
certificates of public officials. As to matters of Massachusetts law, such
counsel may rely upon opinions of Massachusetts counsel reasonably satisfactory
to Adjustable Rate Fund, in which case the opinion shall state that both they
and Adjustable Rate Fund are justified in so relying.

7. Conditions Precedent to Obligations of Government Securities Trust

The obligations of Government Securities Trust to complete the transactions
provided for herein shall be subject to the performance by Adjustable Rate Fund
of all the obligations to be performed by it hereunder on or before the Closing
Date and the following further conditions:

7.1 All representations and warranties of Adjustable Rate Fund
contained in this Agreement shall be true and correct in all material
respects as of the date hereof and, except as they may be affected by the
transactions contemplated by this Agreement, as of the Closing Date with
the same force and effect as if made on and as of the Closing Date.

7.2 Adjustable Rate Fund shall have delivered to Government Securities
Trust on the Closing Date a statement of its assets and liabilities, which
statement shall be prepared in accordance with generally accepted
accounting principles consistently applied, together with a list of its
portfolio securities showing the adjusted tax bases of such securities by
lot, as of the Closing Date, certified by the Treasurer of Adjustable Rate
Fund.

7.3 Adjustable Rate Fund shall have delivered to Government Securities
Trust on the Closing Date a certificate executed in its name by the
President or a Vice President of Adjustable Rate Fund, in form and
substance satisfactory to Government Securities Trust and dated as of the
Closing Date, to the effect that the representations and warranties of
Adjustable Rate Fund made in this Agreement are true and correct at and as
of the Closing Date except as they may be affected by the transactions
contemplated by this Agreement, and as to such other matters as Government
Securities Trust shall reasonably request.

7.4 On or immediately prior to the Closing Date, Adjustable Rate Fund
shall have declared and paid to its shareholders of record one or more
dividends and/or other distributions so that it will have distributed
substantially all (and in any event not less than ninety-eight percent) of
its investment

B-10
<PAGE> 41

company taxable income (computed without regard to any deduction for
dividends paid), net tax-exempt interest income, if any, and realized net
capital gain, if any, for all taxable years through its liquidation.

7.5 Government Securities Trust shall have received on the Closing
Date a favorable opinion from Shereff, Friedman, Hoffman & Goodman, LLP,
counsel to Adjustable Rate Fund, dated as of the Closing Date, to the
effect that:

7.5.1 Adjustable Rate Fund has been duly incorporated and is an
existing corporation in good standing under the laws of the State of
Maryland;

7.5.2 This Agreement has been duly authorized, executed and
delivered by Adjustable Rate Fund and constitutes a valid and legally
binding obligation of Adjustable Rate Fund enforceable in accordance
with its terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles;

7.5.3 The execution and delivery of the Agreement did not, and the
performance by Adjustable Rate Fund of its obligations hereunder will
not, (i) violate Adjustable Rate Fund's Articles of Incorporation or
By-Laws or (ii) result in a default or a breach of the Management
Agreement, dated June 1, 1992, between Adjustable Rate Fund and
Prudential Mutual Fund Management, Inc., the Custodian Agreement, dated
June 1, 1992, between Adjustable Rate Fund and State Street Bank and
Trust Company, the Distribution Agreement (Class A shares), dated July
1, 1993, between Adjustable Rate Fund and Prudential Mutual Fund
Distributors, Inc., the Distribution Agreement (Class B shares), dated
July 1, 1993, between Adjustable Rate Fund and Prudential Securities
Incorporated, and the Transfer Agency and Service Agreement, dated June
1, 1992, between Adjustable Rate Fund and Prudential Mutual Fund
Services, Inc.; provided, however, that such counsel may state that they
express no opinion in their opinion pursuant to this paragraph 7.5.3
with respect to federal or state securities laws, other antifraud laws
and fraudulent transfer laws; provided further that insofar as
performance by Adjustable Rate Fund of its obligations under this
Agreement is concerned, such counsel may state that they express no
opinion as to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles;

7.5.4 All regulatory consents, authorizations and approvals
required to be obtained by Adjustable Rate Fund under the federal laws
of the United States, the laws of the State of New York and the General
Corporation Law of the State of Maryland for the consummation of the
transactions contemplated by this Agreement have been obtained;

7.5.5 Such counsel knows of no litigation or any governmental
proceeding instituted or threatened against Adjustable Rate Fund that
would be required to be disclosed in the Registration Statement and is
not so disclosed; and

7.5.6 Adjustable Rate Fund has been registered with the SEC as an
investment company, and, to the knowledge of such counsel, no order has
been issued or proceeding instituted to suspend such registration.

B-11
<PAGE> 42

8. Further Conditions Precedent to Obligations of Government Securities
Trust and Adjustable Rate Fund

The obligations of each Fund hereunder are subject to the further
conditions that on or before the Closing Date:

8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of (a) the Directors of Adjustable Rate
Fund and the Trustees of Government Securities Trust, as to the
determinations set forth in Rule 17a-8(a) under the Investment Company Act,
(b) the Trustees of Government Securities Trust as to the assumption by
Government Securities Trust of the liabilities of Adjustable Rate Fund and
(c) the holders of the outstanding shares of Adjustable Rate Fund in
accordance with the provisions of Adjustable Rate Fund's Articles of
Incorporation, and certified copies of the resolutions evidencing such
approvals shall have been delivered to Government Securities Trust and
Adjustable Rate Fund.

8.2 Any proposed change to Intermediate Series' operations that may be
approved by the Trustees of Government Securities Trust subsequent to the
date of this Agreement but in connection with and as a condition to
implementing the transactions contemplated by this Agreement, for which the
approval of Intermediate Series' shareholders is required pursuant to the
Investment Company Act or otherwise, shall have been approved by the
requisite vote of the holders of the outstanding shares of the Intermediate
Series in accordance with the Investment Company Act and the provisions of
the Declaration of Trust of Government Securities Trust, and certified
copies of the resolution evidencing such approval shall have been delivered
to Adjustable Rate Fund.

8.3 On the Closing Date no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with,
this Agreement or the transactions contemplated herein.

8.4 All consents of other parties and all consents, orders and permits
of federal, state and local regulatory authorities (including those of the
SEC and of state Blue Sky or securities authorities, including "no-action"
positions of such authorities) deemed necessary by Government Securities
Trust or Adjustable Rate Fund to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been obtained,
except where failure to obtain any such consent, order or permit would not
involve a risk of a material adverse effect on the assets or properties of
Government Securities Trust or Adjustable Rate Fund, provided that either
party hereto may for itself waive any part of this condition.

8.5 The Registration Statement shall have become effective under the
1933 Act, and no stop orders suspending the effectiveness thereof shall
have been issued, and to the best knowledge of the parties hereto, no
investigation or proceeding under the 1933 Act for that purpose shall have
been instituted or be pending, threatened or contemplated.

8.6 Adjustable Rate Fund and Government Securities Trust shall have
received on or before the Closing Date an opinion of Shereff, Friedman,
Hoffman & Goodman, LLP satisfactory to Adjustable Rate Fund and to
Government Securities Trust, substantially to the effect that for federal
income tax purposes:

8.6.1 The acquisition by Intermediate Series of the assets of
Adjustable Rate Fund in exchange solely for voting shares of
Intermediate Series and the assumption by Intermediate Series of
Adjustable Rate Fund's liabilities, if any, followed by the distribution
of Intermediate Series' voting shares by Adjustable Rate Fund pro rata
to its shareholders, pursuant to its liquidation and constructively in
exchange for their Adjustable Rate Fund shares, will constitute a
reorganization

B-12
<PAGE> 43

within the meaning of Section 368(a)(1)(C) of the Internal Revenue Code,
and Adjustable Rate Fund and Intermediate Series each will be "a party
to a reorganization" within the meaning of Section 368(b) of the
Internal Revenue Code;

8.6.2 Adjustable Rate Fund's shareholders will recognize no gain or
loss upon the constructive exchange of all of their shares of Adjustable
Rate Fund solely for shares of Intermediate Series in complete
liquidation of Adjustable Rate Fund;

8.6.3 No gain or loss will be recognized to Adjustable Rate Fund
upon the transfer of its assets to Intermediate Series in exchange
solely for shares of Intermediate Series and the assumption by
Intermediate Series of Adjustable Rate Fund's liabilities, if any, and
the subsequent distribution of those shares to Adjustable Rate Fund
shareholders in complete liquidation of Adjustable Rate Fund;

8.6.4 No gain or loss will be recognized to Intermediate Series
upon the acquisition of Adjustable Rate Fund's assets in exchange solely
for shares of Intermediate Series and the assumption of Adjustable Rate
Fund's liabilities, if any;

8.6.5 Intermediate Series' basis for those assets will be the same
as the basis thereof when held by Adjustable Rate Fund immediately
before the transfer, and the holding period of such assets acquired by
Intermediate Series will include the holding period thereof when held by
Adjustable Rate Fund;

8.6.6 Adjustable Rate Fund shareholders' basis for the shares of
Intermediate Series to be received by them pursuant to the
reorganization will be the same as their basis for the shares of
Adjustable Rate Fund to be constructively surrendered in exchange
thereof; and

8.6.7 The holding period of Intermediate Series shares to be
received by Adjustable Rate Fund shareholders will include the period
during which Adjustable Rate Fund shares to be constructively
surrendered in exchange therefor were held; provided such Adjustable
Rate Fund shares were held as capital assets by those shareholders on
the date of the exchange.

9. Finder's Fees and Expenses

9.1 Each Fund represents and warrants to the other that there are no
finder's fees payable in connection with the transactions provided for
herein.

9.2 The expenses incurred in connection with the entering into and
carrying out of the provisions of this Agreement shall be allocated to
Adjustable Rate Fund and Intermediate Series pro rata in a fair and
equitable manner in proportion to their respective assets.

10. Entire Agreement; Survival of Warranties

10.1 This Agreement constitutes the entire agreement between the
Funds.

10.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection
herewith shall survive the consummation of the transactions contemplated
hereunder.

11. Termination

Either Fund may at its option terminate this Agreement at or prior to the
Closing Date because of:

11.1 A material breach by the other of any representation, warranty or
covenant contained herein to be performed at or prior to the Closing Date;
or

B-13
<PAGE> 44

11.2 A condition herein expressed to be precedent to the obligations
of either party not having been met and it reasonably appearing that it
will not or cannot be met; or

11.3 A mutual written agreement of Adjustable Rate Fund and Government
Securities Trust, on behalf of Intermediate Series.

In the event of any such termination, there shall be no liability for
damages on the part of either Fund (other than the liability of the Funds to pay
their allocated expenses pursuant to paragraph 9.2) or any Director, Trustee or
officer of Government Securities Trust or Adjustable Rate Fund.

12. Amendment

This Agreement may be amended, modified or supplemented only in writing by
the parties; provided, however, that following the shareholders' meeting called
by Adjustable Rate Fund pursuant to paragraph 5.2, no such amendment may have
the effect of changing the provisions for determining the number of shares of
Intermediate Series to be distributed to Adjustable Rate Fund shareholders under
this Agreement to the detriment of such shareholders without their further
approval.

13. Notices

Any notice, report, demand or other communication required or permitted by
any provision of this Agreement shall be in writing and shall be given by hand
delivery, or prepaid certified mail or overnight service addressed to Prudential
Mutual Fund Management, Inc., One Seaport Plaza, New York, New York 10292,
Attention: S. Jane Rose.

14. Headings; Counterparts; Governing Law; Assignment

14.1 The paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.

14.2 This Agreement may be executed in any number of counterparts,
each of which will be deemed an original.

14.3 This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.

14.4 This Agreement shall bind and inure to the benefit of the parties
and their respective successors and assigns, and no assignment or transfer
hereof or of any rights or obligations hereunder shall be made by either
party without the written consent of the other party. Nothing herein
expressed or implied is intended or shall be construed to confer upon or
give any person, firm or corporation other than the parties and their
respective successors and assigns any rights or remedies under or by reason
of this Agreement.

15. Miscellaneous

The Trustees of Government Securities Trust have authorized the execution
of this Agreement in their capacity as Trustees and not individually and
Adjustable Rate Fund agrees that neither the shareholders nor the Trustees nor
any officer, employee, representative or agent of Government Securities Trust
shall be personally liable upon, nor shall resort be had to their private
property for the satisfaction of, obligations given, executed or delivered on
behalf of or by Government Securities Trust, that the shareholders shall not be
personally liable hereunder, and that Adjustable Rate Fund shall look solely to
the property of Intermediate Series for the satisfaction of any claim hereunder.

B-14
<PAGE> 45

IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed by the President or Vice President of each Fund.

Prudential Adjustable Rate Securities
Fund, Inc.

By
--------------------------------------
President/Vice President

Prudential Government Securities Trust
on behalf of its Intermediate Term
Series

By
--------------------------------------
President/Vice President

B-15
<PAGE> 46

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
SYNOPSIS............................................................................... 2
General........................................................................... 2
The Proposed Reorganization and Liquidation....................................... 2
Reasons for the Proposed Reorganization and Liquidation........................... 3
Certain Differences Between Intermediate Series and Adjustable Rate Fund.......... 5
Structure of Intermediate Series and Adjustable Rate Fund......................... 7
Investment Objectives and Policies................................................ 8
Fees and Expenses................................................................. 10
Management Fees.............................................................. 10
Distribution Fees............................................................ 10
Other Expenses............................................................... 12
Fee Waivers and Subsidy...................................................... 12
Expense Ratios............................................................... 12
Purchases and Redemptions......................................................... 12
Exchange Privileges............................................................... 13
Dividends and Distributions....................................................... 13
Federal Tax Consequences of Proposed Reorganization............................... 14
PRINCIPAL RISK FACTORS................................................................. 14
THE PROPOSED TRANSACTION............................................................... 15
Agreement and Plan of Reorganization and Liquidation.............................. 15
Reasons for the Reorganization and Liquidation.................................... 16
Description of Securities to be Issued............................................ 17
Tax Considerations................................................................ 17
Certain Comparative Information About the Funds................................... 17
Organization................................................................. 17
Capitalization............................................................... 17
Shareholder Meetings and Voting Rights....................................... 18
Shareholder Liability........................................................ 18
Liability and Indemnification of Directors/Trustees.......................... 18
Pro Forma Capitalization and Ratios............................................... 19
INFORMATION ABOUT INTERMEDIATE SERIES.................................................. 19
INFORMATION ABOUT ADJUSTABLE RATE FUND................................................. 20
VOTING INFORMATION..................................................................... 22
OTHER MATTERS.......................................................................... 23
SHAREHOLDERS' PROPOSALS................................................................ 23
APPENDIX A -- Performance Overview..................................................... A-1
APPENDIX B -- Agreement and Plan of Reorganization and Liquidation..................... B-1
TABLE OF CONTENTS
ENCLOSURES
Prospectus of Intermediate Series dated April 3, 1995, including a May 12, 1995
Supplement thereto.
Prospectus of Adjustable Rate Fund dated June 26, 1995.
Annual Report of Adjustable Rate Fund for the fiscal year ended February 28, 1995.
</TABLE>
<PAGE> 47

PRUDENTIAL GOVERNMENT SECURITIES TRUST
STATEMENT OF ADDITIONAL INFORMATION

DATED JUNE 26, 1995

ACQUISITION OF ASSETS OF
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.

ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(800) 225-1852

------------------

BY AND IN EXCHANGE FOR THE SHARES OF
PRUDENTIAL GOVERNMENT SECURITIES TRUST -- INTERMEDIATE TERM SERIES
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(800) 225-1852

This Statement of Additional Information, relating specifically to the
proposed transfer of all the assets and the assumption of all the liabilities,
if any, of Prudential Adjustable Rate Securities Fund, Inc. (the Acquired Fund)
by Prudential Government Securities Trust -- Intermediate Term Series (the
Acquiring Fund) consists of this cover pages, the attached pro forma financial
statements and the following described documents, each of which is attached
hereto and incorporated herein by reference.

1. The Statement of Additional Information of the Acquiring Fund dated
April 3, 1995 to the extent that it relates to the Acquiring Fund only
and not to any other series of Prudential Government Securities Trust;
and

2. The Annual Report to Shareholders of the Acquired Fund for the fiscal
year ended February 28, 1995.

The Statement of Additional Information is not a prospectus. A Prospectus
and Proxy Statement dated June 26, 1995 relating to the above referenced matter
may be obtained from the Acquiring Fund without charge by writing or calling
Prudential Government Securities Trust, at the address or telephone number
listed above. This Statement of Additional Information relates to, and should be
read in conjunction with, the Prospectus and Proxy Statement.

1
<PAGE> 48

FINANCIAL STATEMENTS

The following are pro forma financial statements which give effect to the
proposed transaction whereby all the assets of Prudential Adjustable Rate
Securities Fund, Inc. will be exchanged for shares of Prudential Government
Securities Trust Intermediate Series and Prudential Government Securities Trust
Intermediate Series will assume the liabilities, if any, of Prudential
Adjustable Rate Securities Fund, Inc. Immediately thereafter, the shares of
Prudential Government Securities Trust Intermediate Series will be distributed
to the shareholders of Prudential Adjustable Rate Securities Fund, Inc. in a
total liquidation of Prudential Adjustable Rate Securities Fund, Inc. which will
subsequently be dissolved. The following pro forma financial statements include
a pro forma Portfolio of investments at November 30, 1994, a pro forma Statement
of Assets and Liabilities at November 30, 1994 and a pro forma Statement of
Operations for the year ended November 30, 1994.

PRO-FORMA FINANCIAL STATEMENTS
PRO-FORMA PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE
------------------------------- --------------------------------------------- -------------------------------------------
PRUDENTIAL PRUDENTIAL
ADJ. GOVERNMENT PRUDENTIAL
RATE SECURITIES PRUDENTIAL GOVERNMENT
SECURITIES INTER. ADJ. RATE SECURITIES
FUND SERIES SECURITIES INTER. PRO-FORMA
(000) (000) TOTAL FUND SERIES COMBINED
----- ------ ------ ----------- ------------ ------------

<C> <C> <C> <S> <C> <C> <C>
LONG-TERM INVESTMENTS
FEDERAL HOME LOAN MORTGAGE CORPORATION
3,206 3,206 7.375%, 7/1/22............................... $ 3,238,335 $ 3,238,335
6,879 6,879 6.349%, 10/1/23.............................. 6,965,010 6,965,010
5,534 5,534 5.125%, 5/1/24............................... 5,448,880 5,448,880
73 73 8.00%, 6/1/24................................ $ 69,521 69,521
9,892 9,892 5.003%, 7/1/24............................... 9,648,248 9,648,248
8,102 8,102 5.00%, 8/1/24................................ 7,887,229 7,887,229
5,109 5,109 Zero Coupon, 10/1/29......................... 5,108,848 5,108,848
----------- ------------ ------------
38,296,550 69,521 38,366,071
----------- ------------ ------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
21 21 7.50%, 10/1/01............................... 20,019 20,019
------------ ------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
6,671 6,671 6.00%, 7/20/24............................... 6,372,996 6,372,996
4,052 4,052 6.00%, 8/20/24............................... 3,870,503 3,870,503
5,056 5,056 Zero Coupon, 7/20/24 - 8/20/24............... 4,829,768 4,829,768
8,478 8,478 6.00%, 9/20/24............................... 8,099,204 8,099,204
----------- ------------ ------------
4,829,768 18,342,703 23,172,471
----------- ------------ ------------
RESOLUTION TRUST CORPORATION MORTGAGE
PASS-THROUGH
8,201 8,201 6.03%, 12/25/20.............................. 8,275,190 8,275,190
----------- ------------
UNITED STATES TREASURY NOTES
41,000* 41,000 4.00%, 1/31/96............................... 39,603,540 39,603,540
17,000* 17,000 4.75%, 2/15/97............................... 16,057,010 16,057,010
16,000* 16,000 8.50%, 4/15/97............................... 16,329,920 16,329,920
99,000 99,000 5.125%, 11/30/98............................. 90,120,690 90,120,690
6,000 6,000 7.25%, 8/15/04............................... 5,725,320 5,725,320
20,000 20,000 7.875%, 11/15/04............................. 19,867,969 19,867,969
------------ ------------
187,704,449 187,704,449
------------ ------------
Total Long-Term Investments (cost
$261,968,300)............................... 51,401,508 206,136,692 257,538,200
----------- ------------ ------------
SHORT-TERM INVESTMENTS
FEDERAL NATIONAL MORTGAGE ASSOCIATION
6,000 6,000 5.93%, 1/10/95 (cost $5,998,704)............. 5,998,704 5,998,704
----------- ------------
JOINT REPURCHASE AGREEMENT ACCOUNT
5,286 1,439 6,725 5.692%, 12/1/94 (cost $6,725,000)............ 5,286,000 1,439,000 6,725,000
----------- ------------ ------------
Total Short-Term Investments (cost
$12,723,704)................................ 11,284,704 1,439,000 12,723,704
----------- ------------ ------------
TOTAL INVESTMENTS (cost $274,692,004)........ 62,686,212 207,575,692 270,261,904
Other assets in excess of liabilities........ 8,032,205 34,404,415 42,436,620
----------- ------------ ------------
NET ASSETS................................... $70,718,417 $241,980,107 $312,698,524
============= ============== ==============
</TABLE>

- ---------------

* Asset segregated for dollar rolls.

2
<PAGE> 49

PRO-FORMA STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1994
(UNAUDITED)

<TABLE>
<CAPTION>
PRUDENTIAL
PRUDENTIAL GOVERNMENT
ADJ. RATE SECURITIES
SECURITIES INTER. PRO-FORMA PRO-FORMA
FUND SERIES ADJUSTMENTS COMBINED
----------- ------------ ------- ------------
<S> <C> <C> <C> <C>
ASSETS
Investments, at value (cost $63,515,114 and
$211,176,890 and $274,692,004, respectively)...... $62,686,212 $207,575,692 $270,261,904
Interest receivable................................. 1,003,798 1,507,746 2,511,544
Receivable for investments sold..................... 11,738,594 54,380,133 66,118,727
Receivable for Fund and Series shares sold,
respectively...................................... 14,872,266 37,209 14,909,475
Fees receivable on securities loaned................ 17,196 17,196
Deferred expenses and other assets.................. 93,457 10,022 (92,476)* 11,003
----------- ------------ ------- ------------
Total assets................................ 90,394,327 263,527,998 (92,476) 353,829,849
----------- ------------ ------- ------------
LIABILITIES
Investments sold short, at value (proceeds
$14,872,266)...................................... 14,901,600 14,901,600
Payable for investments purchased................... 2,992,500 19,989,792 22,982,292
Payable for shares reacquired....................... 1,584,162 1,061,352 2,645,514
Accrued expenses and other liabilities.............. 129,980 29,452 159,432
Dividends payable................................... 67,668 355,635 423,303
Due to Manager...................................... 81,260 81,260
Due to Distributors................................. 30,400 30,400
----------- ------------ ------- ------------
Total liabilities........................... 19,675,910 21,547,891 -- 41,223,801
----------- ------------ ------- ------------
Net Assets.......................................... 70,718,417 241,980,107 (92,476) 312,606,048
=========== ============ ======= ============
Net assets were comprised of:
Common stock at par............................. 75,216 (75,216)** --
Shares of beneficial interest, at par ($.01 per
share)........................................ 263,903 77,119** 341,022
Paid in capital in excess of par................ 81,036,617 326,069,502 (94,379)** 407,011,740
----------- ------------ ------- ------------
81,111,833 326,333,405 (92,476) 407,352,762
----------- ------------ ------- ------------
Undistributed net investment income................. 2,133,743 2,133,743
Accumulated net realized losses..................... (9,302,517) (82,885,843) (92,188,360)
Net unrealized depreciation of investments.......... (1,090,899) (3,601,198) (4,692,097)
----------- ------------ ------- ------------
Net assets as of November 30, 1994.................. 70,718,417 241,980,107 (92,476) 312,606,048
=========== ============ ======= ============
Shares of beneficial interest issued and
outstanding....................................... 26,390,334 34,102,272
============ ============
Net asset value................................. $ 9.17 $ 9.17
============ ============
Class A:
Net asset value and redemption price per share
($69,543,306/7,397,043 shares of common stock
issued and outstanding)....................... $ 9.40
Maximum sales charge (1.0% of offering price)... 0.09
-----------
9.49
===========
Class B:
Net asset value and redemption price per share
($1,175,111/124,558 shares of common stock
issued and outstanding)....................... $ 9.43
===========
</TABLE>

- ---------------
* Adjustment to reflect the write-off of unamortized deferred organization
costs of Adjustable Rate Securities Fund.

** Adjustment to reflect the exchange of common stock of Adjustable Rate
Securities Fund for shares of beneficial interest in Government Securities
Trust Intermediate Series.

3
<PAGE> 50

PRO-FORMA STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1994
(UNAUDITED)

<TABLE>
<CAPTION>
PRUDENTIAL
PRUDENTIAL GOVERNMENT
ADJ. RATE SECURITIES
SECURITIES INTER. PRO-FORMA PRO-FORMA
FUND SERIES ADJUSTMENTS COMBINED
----------- ------------ -------- ------------
<S> <C> <C> <C> <C>
NET INVESTMENT INCOME
Income
Interest................................. $ 4,860,819 $ 19,425,626 $ 24,286,445
Income from securities loaned............ 22,315 22,315
----------- ------------ ------------
Total Income........................ 4,860,819 19,447,941 24,308,760
----------- ------------ ------------
Expenses
Management fee........................... 586,208 1,229,526 (134,694)(a) 1,681,040
Distribution fee......................... 43,257 665,503 282,857(b) 991,617
Transfer agent's fees & expenses......... 74,250 384,000 458,250
Custodian's fees & expenses.............. 144,000 120,000 (60,000)(c) 204,000
Registration fees........................ 74,750 61,000 135,750
Reports to shareholders.................. 60,375 57,000 (30,000)(c) 87,375
Audit fee................................ 42,000 35,000 (37,000)(c) 40,000
Directors & Trustees' fees............... 48,000 15,200 (48,000)(c) 15,200
Amortization of deferred organizational
expenses............................... 33,400 92,476(d) 125,876
Legal fees............................... 13,250 16,000 (13,250)(c) 16,000
Insurance expense........................ 4,900 8,000 (4,900)(c) 8,000
Miscellaneous............................ 4,509 4,101 (4,000)(c) 4,610
----------- ------------ -------- ------------
Total Expenses...................... 1,128,899 2,595,330 43,489 3,767,718
----------- ------------ -------- ------------
Net investment income........................ 3,731,920 16,852,611 (43,489) 20,541,042
----------- ------------ -------- ------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss)..................... (1,187,710) (15,205,293) (16,393,003)
Net change in unrealized appreciation........ (1,109,891) (10,351,690) (11,461,581)
----------- ------------ ------------
Net gain (loss) on investments........... (2,297,601) (25,556,983) (27,854,584)
----------- ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS.................. $ 1,434,319 $ (8,704,372) (43,489) $ (7,313,542)
============ ============= ========= =============
</TABLE>

- ---------------
(a) Adjustment to reflect reduction in management fees of Government Securities
Trust Intermediate Series.

(b) Adjustment to reflect distribution fee on Government Securities Trust
Intermediate Series.

(d) Adjustment to reflect the write off of unamortized deferred organization
costs of Adjustable Rate Fund.

4
<PAGE> 51

NOTES TO PRO-FORMA FINANCIAL STATEMENTS

The Prudential Government Securities Trust is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company, and consists of three series one of which is Intermediate Term Series
(the "Fund").

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of the significant accounting policies followed
by the Fund in the preparation of its financial statements.

SECURITIES VALUATION: The Fund values portfolio securities on the basis of
current market quotations provided by a pricing service authorized by the
Trustees. The pricing service considers such factors as security prices, yields,
maturities, call features, ratings and developments relating to specific
securities in arriving at securities valuations. When market quotations are not
readily available, a security is valued by appraisal at its fair value as
determined in good faith under procedures established under the general
supervision and responsibility of the Trustees. Short-term securities which
mature in more than 60 days are valued at current market quotations. Short-term
securities which mature in 60 days or less are valued at amortized cost.

In connection with transactions in repurchase agreements, the Fund's
custodian or designated subcustodians, as the case may be under triparty
repurchase agreements, takes possession of the underlying collateral securities,
the value of which exceeds the principal amount of the repurchase transaction,
including accrued interest. If the seller defaults and the value of the
collateral declines or if bankruptcy proceedings are commenced with respect to
the seller of the security, realization of the collateral by the Fund may be
delayed or limited.

SECURITIES LENDING: The Fund may lend its U.S. Government securities to
broker-dealers or government securities dealers. The Fund's policy is to receive
collateral on each loan at least equal, at all times, to the market value of the
securities loaned. The Series may bear the risk of delay in recovery of, or even
loss of rights in, the collateral should the borrower of the securities fail
financially. The Series receives compensation for lending its securities in the
form of fees or it retains a portion of interest on the investment of any cash
received as collateral. The Series also continues to receive interest on the
securities loaned that may occur during the term of the loan will be for the
account of the Series.

DOLLAR ROLLS: The Fund enters into dollar roll transactions in which the Series
sells securities for delivery in the current month, realizing a gain or loss,
and simultaneously contracts to repurchase somewhat similar (same type, coupon
and maturity) securities on a specified future date. During the roll period the
Fund forgoes principal and interest paid on the securities. The Fund is
compensated by the interest earned on the cash proceeds of the initial sale and
by the lower repurchase price at the future date. The difference between the
sale proceeds and the lower repurchase price is taken into income. The Fund
maintains a segregated account, the dollar value of which is equal to its
obligations in respect of dollar rolls.

FEDERAL INCOME TAXES: For federal income tax purposes, each series of the Fund
is treated as a separate taxable entity. It is each series' policy to continue
to meet the requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable net income to its
shareholders. Therefore, no federal income tax provision is required.

5
<PAGE> 52

EQUALIZATION: The Fund follows the accounting practice known as equalization by
which a portion of the proceeds from sales and costs of reacquisitions of its
shares, equivalent on a per share basis to the amount of distributable net
investment income on the date of the transaction, is credited or charged to
undistributed net investment income. As a result, undistributed net investment
income per share is unaffected by sales or reacquisitions of the shares.

DIVIDENDS AND DISTRIBUTIONS: The Fund declares dividends from net investment
income daily; payment of dividends is made monthly. Distributions of net capital
gains, if any, are made annually. Income distributions and capital gain
distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles.

REORGANIZATION AND SOLICITATION EXPENSES: Expenses of reorganization and
solicitation will be borne by the Adjustable Rate Fund and Intermediate Series
in proportion to their respective assets and will include reimbursement of
brokerage firms and others for expenses in forwarding proxy solicitation
material to shareholders.

NOTE 2. AGREEMENTS

The Fund has a management agreement with Prudential Mutual Fund Management,
Inc. ("PMF"). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporations ("PIC"); PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the costs of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.

The management fee paid to PMF is computed daily and payable monthly, at an
annual rate of .40 of 1% of the average daily net assets of the Fund.

To reimburse PSI for its expenses as distributor, the Fund has entered into
a distribution agreement and a plan of distribution pursuant to which it pays
PSI a fee, accrued daily and payable monthly, at an annual rate of .25 of 1% of
the lesser of (a) the aggregate sales of shares issued (not including
reinvestment of dividends and distributions) on or after July 1, 1985 (the
effective date of the plan) less the aggregate net asset value of any such
shares redeemed, or (b) the average net asset value of the shares issued after
the effective date of the plan. Distribution expenses include commission credits
to PSI branch offices for payments of commissions and account servicing fees to
financial advisers and an allocation on account of overhead and other
distribution-related expenses, the cost of printing and mailing prospectuses to
potential investors and of advertising incurred in connection with the
distribution of series shares. In addition, PSI pays other broker-dealers,
including Pruco, an affiliated broker-dealer, for account servicing fees and
other expenses incurred by such broker-dealers in distributing these shares.

PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.

6
<PAGE> 53

PRUDENTIAL GOVERNMENT SECURITIES TRUST

Statement of Additional Information
dated April 3, 1995

Prudential Government Securities Trust (the Trust) is offered in three
series: the Money Market Series, the U.S. Treasury Money Market Series and the
Intermediate Term Series. Each series operates as a separate fund with its own
investment objectives and policies designed to meet its specific investment
goals. The investment objectives of the Money Market Series and the U.S.
Treasury Money Market Series are to obtain high current income, preserve
capital and maintain liquidity. The investment objective of the Intermediate
Term Series is to achieve a high level of income consistent with providing
reasonable safety. There can be no assurance that any series' investment
objective will be achieved.

The Trust's address is One Seaport Plaza, New York, New York 10292, and its
telephone number is (800) 225-1852.

This Statement of Additional Information sets forth information about each
of the series. This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Trust's Money Market Series Prospectus,
U.S. Treasury Money Market Series Prospectus or Intermediate Term Series
Prospectus, each dated April 3, 1995, copies of which may be obtained from the
Trust upon request.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
CROSS-REFERENCE
CROSS-REFERENCE TO PAGE IN U.S. CROSS-REFERENCE
TO PAGE IN TREASURY MONEY TO PAGE IN
MONEY MARKET MARKET SERIES INTERMEDIATE TERM
PAGE SERIES PROSPECTUS PROSPECTUS SERIES PROSPECTUS
---- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
General Information....................... B-2 11 11 13
Investment Objective(s) and Policies...... B-3 --
Money Market Series.................. B-3 6 --
U.S. Treasury Money Market Series.... B-4 -- 6 --
Intermediate Term Series............. B-5 -- -- 6
Portfolio Turnover........................ B-5 -- -- --
Investment Restrictions................... B-6 7 7 8
Trustees and Officers..................... B-7 8 8 9
Manager................................... B-9 8 8 9
Distributor............................... B-11 8 8 9
Portfolio Transactions and Brokerage...... B-12 10 9 11
Shareholder Investment Account............ B-13 17 18 18
Net Asset Value........................... B-16 10 10 11
Performance Information................... B-16
Money Market Series and U.S. Treasury
Money Market Series--Calculation of
Yield.............................. B-16 6 6 --
Intermediate Term Series--Calculation
of Yield and Total Return.......... B-17 -- -- 12
Taxes..................................... B-18 10 10 12
Custodian and Transfer and Dividend
Disbursing Agent and Independent
Accountants............................. B-18 10 10 11
Financial Statements...................... B-19 -- -- --
Report of Independent Accountants......... B-33 -- -- --

============================================================================================================

</TABLE>
<PAGE> 54

GENERAL INFORMATION

The Trust is a trust fund of the type commonly known as a
``Massachusetts business trust.'' The Declaration of Trust and the By-Laws of
the Trust are designed to make the Trust similar in most respects to a
Massachusetts business corporation. The principal distinction between the two
forms relates to shareholder liability: under Massachusetts law, shareholders
of a business trust may, in certain circumstances, be held personally liable as
partners for the obligations of the Trust, which is not the case with a
corporation. The Declaration of Trust of the Trust provides that shareholders
shall not be subject to any personal liability for the acts or obligations of
the Trust and that every written obligation, contract, instrument or
undertaking made by the Trust shall contain a provision to the effect that the
shareholders are not individually bound thereunder.

Massachusetts counsel for the Trust are of the opinion that no personal
liability will attach to the shareholders under any undertaking containing such
provision when adequate notice of such provision is given, except possibly in a
few jurisdictions. With respect to all types of claims in the latter
jurisdictions and with respect to tort claims, contract claims where the
provision referred to is omitted from the undertaking, claims for taxes and
certain statutory liabilities in other jurisdictions, a shareholder may be held
personally liable to the extent that claims are not satisfied by the Trust.
However, upon payment of any such liability the shareholder will be entitled to
reimbursement from the general assets of the Trust. The Trustees intend to
conduct the operations of the Trust, with the advice of counsel, in such a way
so as to avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Trust.

The Declaration of Trust further provides that no trustee, officer,
employee or agent of the Trust is liable to the Trust or to a shareholder, nor
is any trustee, officer, employee or agent liable to any third persons in
connection with the affairs of the Trust, except as such liability may arise
from his or its own bad faith, wilful misfeasance, gross negligence, or
reckless disregard of his or its duties. It also provides that all third
persons shall look solely to the Trust property for satisfaction of claims
arising in connection with the affairs of the Trust. With the exceptions
stated, the Declaration of Trust permits the Trustees to provide for the
indemnification of trustees, officers, employees or agents of the Trust against
all liability in connection with the affairs of the Trust.

Other distinctions between a corporation and a Massachusetts business
trust include the absence of a requirement that business trusts issue share
certificates.

The Trust shall continue without limitation of time subject to the
provisions in the Declaration of Trust concerning termination by action of the
shareholders or by the Trustees by written notice to the shareholders.

Pursuant to the Declaration of Trust, the Trustees initially authorized
the issuance of an unlimited number of full and fractional shares of a single
class. In connection with the establishment of the Intermediate Term Series on
July 1, 1982, the Trustees designated the outstanding shares and shares that
may thereafter be issued under previous authority as the shares of the Money
Market Series. On November 1, 1991, the Trustees established the U.S. Treasury
Money Market Series by designating it out of the unissued shares of beneficial
interest of the Trust. In so designating, the Trustees did not change any of
the existing shareholders' preferences, privileges, limitations or voting
rights. Each share of the Money Market Series, the U.S. Treasury Money Market
Series and the Intermediate Term Series represents an equal proportionate
interest in the assets of the Trust attributable to the respective series with
each other share of the respective series. The Declaration of Trust permits the
Trustees to divide or combine the shares of any series into a greater or lesser
number of shares without thereby changing the proportionate beneficial
interests of the shares of any series in the assets of the Trust attributable
to such series. If the assets attributable to one series of shares are
insufficient to satisfy its liabilities, the assets of other series could be
subjected to such liabilities. Upon liquidation of the Trust, shareholders are
entitled to share pro rata in the net assets of the Trust attributable to the
series of which shares are held and available for distribution to shareholders.
Shares have no preemptive, appraisal or conversion rights and, except as may be
otherwise indicated hereby, no preference rights. Shares are fully paid and
nonassessable by the Trust.

Pursuant to the Declaration of Trust, the Trustees may authorize the
creation of additional series of shares (the proceeds of which would be
invested in separate, independently managed portfolios with distinct investment
objectives and policies and share purchase, redemption and net asset valuation
procedures) and additional classes of shares within any series (which would be
used to distinguish among the rights of different categories of shareholders,
as might be required by future regulations or other unforeseen circumstances)
with such preferences, privileges, limitations and voting and dividend rights
as the Trustees may determine. All consideration received by the Trust for
shares of any additional series or class, and all assets in which such
consideration is invested, would belong to that series or class (subject only
to the rights of creditors of the Trust) and would be subject to the
liabilities related thereto. Pursuant to the Investment Company Act of 1940, as
amended (the Investment Company Act), shareholders of any additional series or
class of shares would normally have to approve any changes in the management
contract relating to such series or class and of any changes in the investment
policies related thereto.

The Trustees themselves have the power to alter the number and the terms of
office of the Trustees, and they may at any time lengthen their own terms or
make their terms of unlimited duration (subject to certain removal procedures)
and appoint their own successors, provided that always at least a majority of
the Trustees have been elected by the shareholders of the Trust. The voting
rights
B-2
<PAGE> 55

of shareholders are not cumulative, so that holders of more than 50 percent of
the shares voting can, if they choose, elect all trustees being selected, while
the holders of the remaining shares would be unable to elect any trustees.

On April 22, 1983, the Trustees at a meeting of the Board of Trustees
approved an amendment to the Declaration of Trust to effect a name change from
Chancellor Government Securities Trust to Prudential-Bache Government
Securities Trust. On February 28, 1991, the Trustees approved an amendment to
the Fund's Declaration of Trust to change the Trust's name from
Prudential-Bache Government Securities Trust to Prudential Government
Securities Trust.

INVESTMENT OBJECTIVES AND POLICIES

The Money Market Series, the U.S. Treasury Money Market Series and the
Intermediate Term Series operate as separate funds with their own investment
objectives and policies. The investment objectives of the Money Market Series
and the U.S. Treasury Money Market Series are to obtain high current income,
preserve capital and maintain liquidity. The investment objective of the
Intermediate Term Series is to achieve a high level of income consistent with
providing reasonable safety. For a further description of the investment
objectives and policies for each series see ``How the Trust Invests--Investment
Objective and Policies'' in their respective Prospectuses. There can be no
assurance that any series' investment objective will be achieved.

In order to achieve their objectives, the Money Market Series, the U.S.
Treasury Money Market Series and the Intermediate Term Series (collectively
referred to as the Series), each acting independently of the other, may, when
appropriate, invest in the types of instruments and use certain strategies
described below:

REPURCHASE AGREEMENTS. The Trust's repurchase agreements will be
collateralized by U.S. Government obligations. The Trust will enter into
repurchase transactions only with parties meeting creditworthiness standards
approved by the Trustees. The Trust's investment adviser will monitor the
creditworthiness of such parties, under the general supervision of the
Trustees. In the event of a default or bankruptcy by a seller, the Trust will
promptly seek to liquidate the collateral. To the extent that the proceeds from
any sale of such collateral upon a default in the obligation to repurchase are
less than the repurchase price, the Trust will suffer a loss.

The Trust participates in a joint repurchase account with other investment
companies managed by Prudential Mutual Fund Management, Inc. (PMF or the
Manager) pursuant to an order of the Securities and Exchange Commission (SEC).
On a daily basis, any uninvested cash balances of the Trust may be aggregated
with those of such investment companies and invested in one or more repurchase
agreements. Each fund participates in the income earned or accrued in the joint
account based on the percentage of its investment.

MONEY MARKET SERIES

The Money Market Series seeks to achieve its objectives by investing in
United States Government securities that mature within thirteen months from
date of purchase, including a variety of securities which are issued or
guaranteed by the United States Treasury, by various agencies of the United
States Government or by various instrumentalities which have been established
or sponsored by the United States Government. These obligations, including
those which are guaranteed by Federal agencies or instrumentalities, may or may
not be backed by the ``full faith and credit'' of the United States. In the
case of securities not backed by the full faith and credit of the United
States, the Trust must look principally to the agency issuing or guaranteeing
the obligation for ultimate repayment and may not be able to assert a claim
against the United States itself in the event the agency or instrumentality
does not meet its commitments. Securities in which the Money Market Series may
invest which are not backed by the full faith and credit of the United States
include, but are not limited to, obligations of the Tennessee Valley Authority,
the Federal National Mortgage Association and the United States Postal Service,
each of which has the right to borrow from the United States Treasury to meet
its obligations, and obligations of the Federal Farm Credit System and the
Federal Home Loan Banks, whose obligations may only be satisfied by the
individual credits of each issuing agency. Treasury securities include Treasury
bills, Treasury notes and Treasury bonds, all of which are backed by the full
faith and credit of the United States, as are obligations of the Government
National Mortgage Association, the Farmers Home Administration and the
Export-Import Bank. The Money Market Series will invest at least 80% of its
assets in such types of government securities.

The Series may also invest in component parts of U.S. Treasury notes or
bonds, namely, either the corpus (principal) of such Treasury obligations or
one of the interest payments scheduled to be paid on such obligations. These
obligations may take the form of (i) Treasury obligations from which the
interest coupons have been stripped, (ii) the interest coupons that are
stripped, (iii) book-entries at a Federal Reserve member bank representing
ownership of Treasury obligation components, or (iv) receipts evidencing the
component parts (corpus or coupons) of Treasury obligations that have not
actually been stripped. Such receipts evidence ownership of component parts of
Treasury obligations (corpus or coupons) purchased by a third party (typically
an investment banking firm) and held on behalf of the third party in physical
or book-entry form by a major commercial bank or trust company pursuant to a
custody agreement with the third party. Treasury obligations, including those
underlying such receipts, are backed by the full faith and credit of the U.S.
Government.

The Money Market Series may also invest in fully insured certificates of
deposit. The Federal Deposit Insurance Corporation and the Federal Savings and
Loan Insurance Corporation, which are agencies of the United States Government,
insure the deposits of insured
B-3
<PAGE> 56

banks and savings and loan associations, respectively, up to $100,000
per depositor. Current federal regulations also permit such institutions to
issue insured negotiable certificates of deposit (CDs) in amounts of $100,000
or more without regard to the interest rate ceilings on other deposits. To
remain fully insured as to principal, such CDs must currently be limited to
$100,000 per bank or savings and loan association. Interest on such CDs is not
insured. The Money Market Series may invest in such CDs, limited to the insured
amount of principal ($100,000) in each case and to 10% or less of the gross
assets of the Money Market Series in all such CDs in the aggregate. Such CDs
may or may not have a readily available market, and the investment of the Money
Market Series in CDs which do not have a readily available market is further
limited by the restriction on investment by the Money Market Series of not more
than 10% of assets in securities for which there is no readily available
market. See ``Investment Restrictions.''

The Money Market Series will attempt to balance its objectives of high
income, capital preservation and liquidity by investing in securities of
varying maturities and risks. As a result, the Money Market Series may not
necessarily invest in securities with the highest available yield. The Money
Market Series will not, however, invest in securities with remaining maturities
of more than thirteen months or maintain a dollar-weighted average maturity
which exceeds 90 days. The amounts invested in obligations of various
maturities of thirteen months or less will depend on management's evaluation of
the risks involved. Longer-term issues, while frequently paying higher interest
rates, are subject to greater fluctuations in value resulting from general
changes in interest rates than are shorter-term issues. Thus, when rates on new
securities increase, the value of outstanding longer-term securities may
decline and vice versa. Such changes may also occur, but to a lesser degree,
with short-term issues. These changes, if realized, may cause fluctuations in
the amount of daily dividends and, in extreme cases, could cause the net asset
value per share to decline. See ``Net Asset Value.'' In the event of unusually
large redemption demands, securities may have to be sold at a loss prior to
maturity or the Money Market Series may have to borrow money and incur interest
expense. Either occurrence would adversely affect the amount of daily dividends
and could result in a decline in daily net asset value per share or the
reduction by the Money Market Series of the number of shares held in a
shareholder's account. The Money Market Series will attempt to minimize these
risks by investing in longer-term securities, subject to the foregoing
limitations, when it appears to management that yields on such securities are
not likely to increase substantially during the period of expected holding, and
then only in securities which are readily marketable. However, there can be no
assurance that the Money Market Series will be successful in achieving this
objective.

Liquidity Puts. The Money Market Series may also purchase instruments
of the types described in this section together with the right to resell the
instruments at an agreed-upon price or yield within a specified period prior to
the maturity date of the instruments. Such a right to resell is commonly known
as a ``put,'' and the aggregate price which the Money Market Series pays for
instruments with puts may be higher than the price which otherwise would be
paid for the instruments. Consistent with the Money Market Series' investment
objective and applicable rules issued by the SEC and subject to the supervision
of the Trustees, the purpose of this practice is to permit the Money Market
Series to be fully invested while preserving the necessary liquidity to meet
unusually large redemptions and to purchase at a later date securities other
than those subject to the put. The Money Market Series may choose to exercise
puts during periods in which proceeds from sales of its shares and from recent
sales of portfolio securities are insufficient to meet redemption requests or
when the funds available are otherwise allocated for investment. In determining
whether to exercise puts prior to their expiration date and in selecting which
puts to exercise in such circumstances, the Money Market Series' investment
adviser considers, among other things, the amount of cash available to the
Money Market Series, the expiration dates of the available puts, any future
commitments for securities purchases, the yield, quality and maturity dates of
the underlying securities, alternative investment opportunities and the
desirability of retaining the underlying securities in the Money Market Series'
portfolio.

Since the value of the put is dependent on the ability of the put
writer to meet its obligation to repurchase, the Money Market Series' policy is
to enter into put transactions only with such brokers, dealers or financial
institutions which present minimal credit risks. There is a credit risk
associated with the purchase of puts in that the broker, dealer or financial
institution might default on its obligation to repurchase an underlying
security. In the event such a default should occur, the Money Market Series is
unable to predict whether all or any portion of any loss sustained could
subsequently be recovered from the broker, dealer or financial institution.

The Money Market Series values instruments which are subject to puts at
amortized cost; no value is assigned to the put. The cost of the put, if any,
is carried as an unrealized loss from the time of purchase until it is
exercised or expires.

U.S. TREASURY MONEY MARKET SERIES

The U.S. Treasury Money Market Series seeks to achieve its objective by
investing in U.S. Treasury securities, including bills,notes and bonds. These
instruments are direct obligations of the U.S. Government and, as such, are
backed by the ``full faith and credit'' of the United States. They differ
primarily in their interest rates and the lengths of their maturities.

The U.S. Treasury Money Market Series may also invest in component
parts of U.S. Treasury notes or bonds, namely, either the corpus (principal) of
such Treasury obligations or one of the interest payments scheduled to be paid
on such obligations. These obligations may take the form of (i) Treasury
obligations from which the interest coupons have been stripped, (ii) the
interest coupons that are stripped, or (iii) book-entries at a Federal Reserve
member bank representing ownership of Treasury obligation components.

B-4
<PAGE> 57

The U.S. Treasury Money Market Series does not engage in repurchase
agreements or lend its portfolio securities because the income from such
activities is generally not exempt from state and local income taxes, but may
purchase or sell securities on a when-issued or delayed delivery basis.
When-issued or delayed delivery transactions arise when securities are
purchased or sold by the Series with payment and delivery taking place in the
future in order to secure what is considered to be an advantageous price and
yield to the Series at the time of entering into the transaction. The Trust's
Custodian will maintain, in a segregated account of the Series, cash or U.S.
Treasury obligations having a value equal to or greater than the Series'
purchase commitments. The Custodian will likewise segregate securities sold on
a delayed delivery basis.

INTERMEDIATE TERM SERIES

The Intermediate Term Series seeks to achieve its objective by
investing in United States Government securities that have maturities of ten
years or less, including a variety of securities which are issued or guaranteed
by the United States Treasury, by various agencies of the United States
Government or by various instrumentalities which have been established or
sponsored by the United States Government. Such obligations are more fully
described under ``Investment Objective and Policies'' in the Prospectus.

The Intermediate Term Series will make purchases and sales of portfolio
securities from the issuer or a government securities dealer on a net price
basis; brokerage commissions are not normally charged on the purchase or sale
of securities such as United States Government obligations. See ``Portfolio
Transactions and Brokerage.''

The Intermediate Term Series intends to vary the proportion of its
holdings of long-and short-term debt securities in order to reflect its
assessment of prospective changes in interest rates even if such action may
adversely affect current income. For example, if, in the opinion of the
Intermediate Term Series' investment adviser, interest rates generally are
expected to decline, the Intermediate Term Series may sell its shorter-term
securities and purchase longer-term securities in order to benefit from greater
expected relative price appreciation; the securities sold may have a higher
current yield than those being purchased. The success of this strategy will
depend on the investment adviser's ability to forecast changes in interest
rates. Moreover, the Intermediate Term Series intends to manage its portfolio
actively by taking advantage of trading opportunities such as sales of
portfolio securities and purchases of higher yielding securities of similar
quality due to distortions in normal yield differentials. In addition, if, in
the opinion of the investment adviser market conditions warrant, the
Intermediate Term Series may purchase U. S. Government securities at a discount
or trade securities in response to fluctuations in interest rates to provide
for the prospect of modest capital appreciation at maturity.

The Intermediate Term Series' investment adviser currently anticipates
that investments will primarily be made in securities with maturities ranging
from 2 to 5 years, but depending on market conditions and changing economic
conditions the Intermediate Term Series may invest in securities of any
maturity 10 years or less. Certain securities with maturities of ten years or
less which are purchased at auction or on a when-issued basis may mature later
than ten years from date of purchase and are eligible for purchase by the
Series.

PORTFOLIO TURNOVER

The Money Market Series and the U.S. Treasury Money Market Series
intend normally to hold their portfolio securities to maturity. The Money
Market Series and the U.S. Treasury Money Market Series do not normally expect
to trade portfolio securities although they may do so to take advantage of
short-term market movements. The Money Market Series and the U.S. Treasury
Money Market Series will make purchases and sales of portfolio securities with
a government securities dealer on a net price basis; brokerage commissions are
not normally charged on the purchase or sale of U.S. Treasury Securities. See
``Portfolio Transactions and Brokerage.''

Although the Intermediate Term Series has no fixed policy with respect
to portfolio turnover, it may sell portfolio securities without regard to the
length of time that they have been held in order to take advantage of new
investment opportunities or yield differentials, or because the Intermediate
Term Series desires to preserve gains or limit losses due to changing economic
conditions. Accordingly, it is possible that the portfolio turnover rate of the
Intermediate Term Series may reach, or even exceed, 250%. The portfolio
turnover rate is computed by dividing the lesser of the amount of the
securities purchased or securities sold (excluding all securities whose
maturities at acquisition were one year or less) by the average monthly value
of such securities owned during the year. A 100% turnover rate would occur, for
example, if all of the securities held in the portfolio of the Intermediate
Term Series were sold and replaced within one year. However, when portfolio
changes are deemed appropriate due to market or other conditions, such turnover
rate may be greater than anticipated. A higher rate of turnover results in
increased transaction costs to the Intermediate Term Series. The portfolio
turnover rate for the Intermediate Term Series for the fiscal years ended
November 30, 1993 and 1994 was 44% and 431%, respectively. The increase in the
Intermediate Term Series' portfolio turnover rate resulted in part from the
repositioning of its portfolio by its current portfolio manager, who commenced
managing the Series' portfolio in November 1993. It also resulted from efforts
to take advantage of yield differentials which existed between mortgage
``pass-through'' securities and U.S. Treasury securities during a year when
short-term interest rates were particularly volatile. These efforts, which
involved sales of pass-through securities in order to buy Treasury securities
and vice versa, added significantly to the Intermediate Term Series' higher
turnover rate.

B-5
<PAGE> 58

INVESTMENT RESTRICTIONS

The Trust's fundamental policies as they affect a particular Series
cannot be changed without the approval of the outstanding shares of such Series
by a vote which is the lesser of (i) 67% or more of the voting securities of
such Series represented at a meeting at which more than 50% of the outstanding
voting securities of such Series are present in person or represented by proxy
or (ii) more than 50% of the outstanding voting securities of such Series. With
respect to the submission of a change in fundamental policy or investment
objective to a particular Series, such matters shall be deemed to have been
effectively acted upon with respect to all Series of the Trust if a majority of
the outstanding voting securities of the particular Series votes for the
approval of such matters as provided above, notwithstanding (1) that such
matter has not been approved by a majority of the outstanding voting securities
of any other Series affected by such matter and (2) that such matter has not
been approved by a majority of the outstanding voting securities of the Trust.

MONEY MARKET SERIES AND INTERMEDIATE TERM SERIES

The following investment restrictions are fundamental policies of the
Trust with respect to the Money Market Series and the Intermediate Term Series
of the Trust and may not be changed except as described above.

The Trust may not:

1. As to any Series, invest in any securities other than the types of
securities listed under the ``Investment Objectives and Policies'' relating to
such Series;

2. Borrow money, except from banks for temporary or emergency purposes,
including the meeting of redemption requests which might otherwise require the
untimely disposition of securities; borrowing in the aggregate may not exceed
20%, and borrowing for purposes other than meeting redemptions may not exceed
5%, of the value of the Trust's total assets (including the amount borrowed),
less liabilities (not including the amount borrowed) at the time the borrowing
is made; investment securities will not be purchased while borrowings are
outstanding;

3. Pledge, hypothecate, mortgage or otherwise encumber its assets, except
in an amount up to 10% of the value of its net assets but only to secure
permitted borrowings of money;

4. Make loans to others, except through the purchase of the debt
obligations and the repurchase agreements covering government securities and
the lending of portfolio securities (limited to thirty percent of the Trust's
total assets);

5. Purchase or sell real estate or real estate mortgage loans;

6. Purchase securities on margin or sell short;

7. Purchase or sell commodities or commodity futures contracts, or oil,
gas, or mineral exploration or development programs;

8. Purchase securities for which there are legal or contractual
restrictions on resale (i.e. restricted securities) or invest more than 10% of
its assets in securities for which there is no readily available market, except
for repurchase agreements for seven days or less;

9. Underwrite securities of other issuers;

10. Purchase warrants, or write, purchase or sell puts, calls, straddles,
spreads or combinations thereof except that the Money Market Series may
purchase instruments together with the right to resell such instruments;

11. Purchase the securities of any other investment company, except in
connection with a merger, consolidation, reorganization or acquisition of
assets;

12. Issue senior securities as defined in the Investment Company Act except
insofar as the Trust may be deemed to have issued a senior security by reason
of: (a) entering into any repurchase agreement; (b) permitted borrowings of
money; or (c) purchasing securities on a when-issued or delayed delivery basis;
and

13. Purchase securities on a when-issued basis if, as a result, more than
15% of the Trust's net assets would be committed.

If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage resulting from a change in values of
portfolio securities or amount of total or net assets will not be considered a
violation of any of the foregoing restrictions. However, in the event that
either Series' asset coverage for borrowings falls below 300%, that Series will
take prompt action to reduce its borrowings, as required by applicable law.

In addition, although not as fundamental policies of the Trust, the Trust
will apply the percentage limitations set forth in Investment Restrictions Nos.
2, 8 and 13 separately to investments made by each of the Money Market Series
and the Intermediate Term Series.

B-6
<PAGE> 59

U.S. TREASURY MONEY MARKET SERIES

In connection with its investment objective and policies as set forth in
the Prospectus, the U.S. Treasury Money Market Series has adopted the following
investment restrictions.

The U.S. Treasury Money Market Series may not:

1. Invest in any securities other than U.S. Treasury obligations.

2. Purchase securities on margin (but the Series may obtain such
short-term credits as may be necessary for the clearance of transactions).

3. Make short sales of securities or maintain a short position.

4. Issue senior securities, borrow money or pledge its assets, except that
the Series may borrow up to 20% of the value of its total assets (calculated
when the loan is made) from banks and from entities other than banks if so
permitted pursuant to an order of the Securities and Exchange Commission for
temporary, extraordinary or emergency purposes. The Series may pledge up to 20%
of the value of its total assets to secure such borrowings.

5. Buy or sell real estate or interests in real estate.

6. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal laws.

7. Make investments for the purpose of exercising control or management.

8. Invest in interests in oil, gas or other mineral exploration or
development programs.

9. Buy or sell commodities or commodity contracts (including futures
contracts and options thereon).

10. Purchase securities for which there are legal or contractual
restrictions on resale (i.e. restricted securities) or invest more than 10% of
its assets in securities for which there is no readily available market, except
for repurchase agreements for seven days or less.

Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the U.S. Treasury Money Market Series' assets, it is
intended that if the percentage limitation is met at the time the investment is
made, a later change in percentage resulting from changing total or net asset
values will not be considered a violation of such policy. However, in the event
that the U.S. Treasury Money Market Series' asset coverage for borrowings falls
below 300%, the Series will take prompt action to reduce its borrowings, as
required by applicable law.

TRUSTEES AND OFFICERS

<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE TRUST DURING PAST 5 YEARS
- ---------------------- -------------- ---------------------

<S> <C> <C>
Delayne Dedrick Gold (56) Trustee Marketing and Management Consultant.
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, NY

Arthur Hauspurg (69) Trustee Trustee and former President, Chief Executive Officer and
c/o Prudential Mutual Fund Chairman of the Board of Consolidated Edison Company of
Management, Inc. New York, Inc.; Director of COMSAT Corp.
One Seaport Plaza
New York, NY
</TABLE>

B-7
<PAGE> 60

<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE TRUST DURING PAST 5 YEARS
- ---------------------- -------------- ---------------------

<S> <C> <C>
*Lawrence C. McQuade (67) President Vice Chairman of PMF (since 1988); Managing Director,
One Seaport Plaza and Trustee Investment Banking , Prudential Securities Incorporated
New York, NY (Prudential Securities) (1988-1991); Director of Czech
and Slovak American Enterprise Fund (since October
1994), Quixote Corporation (since February 1992) and
BUNZL, P.L.C. (since June 1991); formerly, Director of
Crazy Eddie Inc. (1987-1990), Kaiser Tech, Ltd. and
Kaiser Aluminum and Chemical Corp. (March 1987-November
1988); formerly Executive Vice President and Director of
WR Grace & Company; President and Director of The Global
Government Plus Fund, Inc., The Global Total Return
Fund, Inc. and The High Yield Income Fund, Inc.

Stephen P. Munn (52) Trustee Chairman (since January 1994), Director and President
101 South Salina Street (since 1988) and Chief Executive Officer (1988-December
Syracuse, NY 1993) of Carlisle Companies Incorporated.

Louis A. Weil, III (54) Trustee Publisher and Chief Executive Officer, Phoenix Newspapers,
120 E. Van Buren Inc. (since August 1991); Director of Central
Phoenix, AZ Newspapers, Inc. (since September 1991); prior thereto,
Publisher of Time Magazine (May 1989-March 1991);
formerly President, Publisher and Chief Executive
Officer of The Detroit News (February 1986-August 1989);
formerly member of the Advisory Board, Chase Manhattan
Bank-Westchester; Director of The Global Government Plus
Fund, Inc.

Robert F. Gunia (48) Vice President Chief Administrative Officer (since July 1990), Director
One Seaport Plaza (since January 1989), Executive Vice President,
New York, NY Treasurer and Chief Financial Officer (since June 1987)
of PMF; Senior Vice President (since March 1987) of
Prudential Securities; Executive Vice President,
Treasurer and Comptroller (since March 1991) of
Prudential Mutual Fund Distributors, Inc. and Prudential
Mutual Fund Services, Inc., Vice President and Director
of The Asia Pacific Fund, Inc. (since May 1989).

Eugene S. Stark (37) Treasurer and First Vice President (since January 1990) of PMF.
One Seaport Plaza Principal
New York, NY Financial and
Accounting
Officer

S. Jane Rose (49) Secretary Senior Vice President (since January 1991), Senior Counsel
One Seaport Plaza (since June 1987) and First Vice President (June
New York, NY 1987-December 1990) of PMF; Senior Vice President and
Senior Counsel of Prudential Securities (since July
1992); formerly Vice President and Associate General
Counsel of Prudential Securities.

Ronald Amblard (36) Assistant First Vice President (since January 1994), and Associate
One Seaport Plaza Secretary General Counsel (since January 1992) of PMF; Vice
New York, NY President and Associate General Counsel of Prudential
Securities (since January 1992); Assistant General
Counsel (August 1988-December 1991), Associate Vice
President (January 1989-December 1990) and Vice
President (January 1991-December 1993) of PMF.

</TABLE>

- ------------------
*``Interested'' Trustee, as defined in the Investment Company Act.

Trustees of the Trust are elected by the holders of the shares of all
Series of the Trust, and not separately by holders of each Series voting as a
class.

Trustees and officers of the Trust are also trustees, directors and
officers of some or all of the other investment companies distributed by
Prudential Securities or Prudential Mutual Fund Distributors, Inc.

The officers conduct and supervise the daily business operations of the
Trust, while the Trustees, in addition to their functions set forth under
``Manager,'' and ``Distributor,'' review such actions and decide on general
policy.

B-8
<PAGE> 61

The Trust pays each of its directors who is not an affiliated person of
PMF or The Prudential Investment Corporation (PIC) annual compensation of
$9,000, in addition to certain out-of-pocket expenses. The Chairman of the Audit
Committee receives an additional $200 per year.

Trustees may receive their Trustee's fee pursuant to a deferred fee
agreement with the Trust. Under the terms of the agreement, the Trust accrues
daily the amount of such Trustee's fee which accrues interest at a rate
equivalent to the prevailing rate applicable to 90-day U.S. Treasury bills at
the beginning of each calendar quarter or, pursuant to an SEC exemptive order,
at the daily rate of return of the Trust (the Trust Rate). Payment of the
interest so accrued is also deferred and accruals become payable at the option
of the Trustee. The Trust's obligation to make payments of deferred Trustees'
fees, together with interest thereon, is a general obligation of the Trust.

Pursuant to the terms of the Management Agreement with the Trust, the
Manager pays all compensation of officers and employees of the Trust as well as
the fees and expenses of all Trustees of the Trust who are affiliated persons
of the Manager.

The following table sets forth the aggregate compensation paid by the Trust
for the fiscal year ended November 30, 1994 to the Trustees who are not
affiliated with the Manager and the aggregate compensation paid to such
Trustees for service on the Trust's board and that of all other funds managed by
Prudential Mutual Fund Management, Inc. (Fund Complex) for the calendar year
ended December 31, 1994.

COMPENSATION TABLE

<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM TRUST
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND
COMPENSATION AS PART OF TRUST BENEFITS UPON COMPLEX PAID
NAME AND POSITION FROM TRUST EXPENSES RETIREMENT TO TRUSTEES
- ------------------------------------------ ------------ ----------------- ----------------- -------------

<S> <C> <C> <C> <C>
Delayne Dedrick Gold--Trustee $9,200 None N/A $ 185,000(24)*
Arthur Hauspurg--Trustee $9,000 None N/A $ 37,500(5)*
Stephen P. Munn--Trustee $9,000 None N/A $ 40,000(6)*
Louis A. Weil, III--Trustee $9,000 None N/A $ 97,500(12)*
- ------------------
</TABLE>

* Indicates number of funds in Fund Complex (Including the Trust) to which
aggregate compensation relates.

As of January 6, 1995, the Trustees and officers of the Trust, as a group,
owned less than 1% of the outstanding shares of beneficial interest of each of
the Money Market Series, U.S. Treasury Money Market Series and the Intermediate
Term Series of the Trust.

As of January 6, 1995, Prudential Securities was the record holder for
other beneficial owners of 12,985,683 Intermediate Term Series Shares (or 54%
of such shares outstanding), 493,761,686 Money Market Series Shares (or 80% of
such shares outstanding) and 514,185,764 U.S. Treasury Money Market Series
Shares (or 99% of such shares outstanding). In the event of any meetings of
shareholders, Prudential Securities will forward, or cause the forwarding of,
proxy materials to the beneficial owners for which it is the record holder.

MANAGER

The Manager of the Trust is Prudential Mutual Fund Management, Inc.
(PMF or the Manager), One Seaport Plaza, New York, New York 10292. PMF serves
as manager of all of the investment companies that, together with the Trust,
comprise the Prudential Mutual Funds. See ``How the Trust is Managed--Manager''
in the Prospectus of each Series. As of February 28, 1995, PMF managed and/or
administered open-end and closed-end management investment companies with
assets of approximately $46 billion. According to the Investment Company
Institute, as of April 30, 1994, the Prudential Mutual Funds were the 12th
largest family of mutual funds in the United States.

Pursuant to a management agreement with the Trust (the Management
Agreement), PMF, subject to the supervision of the Trustees and in conformity
with the stated policies of the Trust, manages both the investment operations
of the Trust and the composition of the Trust's portfolio, including the
purchase, retention, disposition and loan of securities and other investments.
PMF is obligated to keep certain books and records of the Trust in connection
therewith. PMF is also obligated to provide research and statistical analysis
and to pay costs of certain clerical and administrative services involved in
the portfolio management. The management services of PMF to the Trust are not
exclusive under the terms of the Management Agreement and PMF is free to, and
does, render management services to others.

PMF has authorized any of its directors, officers and employees who have
been elected as trustees or officers of the Trust to serve in the capacities in
which they have been elected. Services furnished by PMF under the Management
Agreement may be furnished by any such directors, officers or employees of PMF.
In connection with the services it renders, PMF bears the following expenses:

B-9
<PAGE> 62

(a) the salaries and expenses of all personnel of the Trust and the
Manager, except the fees and expenses of Trustees who are not affiliated
persons of the Manager;

(b) all expenses incurred by the Manager or by the Trust in connection
with managing the ordinary course of the Trust's business, other than those
assumed by the Trust, as described below; and

(c) the costs and expenses payable to The Prudential Investment
Corporation (PIC) pursuant to a subadvisory agreement between PMF and PIC
(the Subadvisory Agreement).

Under the terms of the Management Agreement, the Trust is responsible
for the payment of the following expenses, including (a) the fee payable to the
Manager, (b) the fees and expenses of Trustees who are not affiliated with PMF
or PIC, (c) the fees and certain expenses of the Trust's Custodian and Transfer
and Dividend Disbursing Agent, including the cost of providing records to the
Manager in connection with its obligation of maintaining required records of
the Trust and of pricing the Trust's shares, (d) the fees and expenses of the
Trust's legal counsel and independent accountants, (e) brokerage commissions
and any issue or transfer taxes chargeable to the Trust in connection with its
securities transactions, (f) all taxes and corporate fees payable by the Trust
to governmental agencies, (g) the fees of any trade association of which the
Trust is a member, (h) the cost of share certificates representing shares of
the Trust, (i) the cost of fidelity, directors and officers and errors and
omissions insurance, (j) the fees and expenses involved in registering and
maintaining registration of the Trust and of its shares with the SEC and
registering the Trust as a broker or dealer and qualifying its shares under
state securities laws, including the preparation and printing of the Trust's
registration statements and prospectuses for such purposes, (k) allocable
communications expenses with respect to investor services and all expenses of
shareholders' and Trustees' meetings and of preparing, printing and mailing
reports to shareholders, (l) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the Trust's
business and (m) distribution fees.

The Trust pays a fee to PMF for the services performed and the facilities
furnished by PMF, computed daily and payable monthly, at an annual rate of .40
of 1% of the Intermediate Term Series' and the U.S. Treasury Money Market
Series' average daily net assets and at an annual rate of .40 of 1% of the
average daily net assets up to $1 billion, .375 of 1% on assets between $1
billion and $1.5 billion and .35 of 1% on assets in excess of $1.5 billion of
the average daily net assets of the Money Market Series. The Management
Agreement also provides that in the event the expenses of the Series (including
the fees of the Manager but excluding interest, taxes, brokerage commissions,
distribution fees, litigation and indemnification expenses and other
extraordinary expenses) for any fiscal year exceed the lowest applicable annual
expense limitation established and enforced pursuant to the statute or
regulations of any jurisdictions in which shares of the Series are then
qualified for offer and sale, PMF will reduce its fee by the amount of such
excess. Reductions in excess of the total compensation payable to PMF will be
paid by PMF to the Series. Any such reductions are subject to readjustment
during the year. Currently, the Trust believes that the most restrictive
expense limitation of state securities commissions is 2 1/2% of the average
daily net assets of each Series up to $30 million, 2% of the average daily net
assets of each Series from $30 million to $100 million and 1 1/2% of any excess
over $100 million. The Management Agreement provides that the Manager shall not
be liable to the Trust for any error of judgment by the Manager or for any loss
sustained by the Trust except in the case of a breach of fiduciary duty with
respect to the receipt of compensation for services (in which case any award of
damages will be limited as provided in the Investment Company Act) or of wilful
misfeasance, bad faith, gross negligence or reckless disregard of duty.

The Management Agreement provides that it shall terminate automatically if
assigned, and that it may be terminated without penalty by either party upon
not more than 60 days', nor less than 30 days', written notice. The Management
Agreement was last approved by the Trustees, including all of the Trustees who
are not interested persons as defined in the Investment Company Act, on May 2,
1994 and by a majority of the outstanding shares of the Money Market Series and
the Intermediate Term Series on April 28, 1988 and a majority of the
outstanding shares of the U.S. Treasury Money Market Series on November 26,
1991.

For the fiscal year ended November 30, 1994 the Trust paid management fees
to PMF of $2,931,469, $1,229,526 and $1,233,814 relating to the Money Market
Series, Intermediate Term Series and U.S. Treasury Money Market Series,
respectively. For the fiscal year ended November 30, 1993, the Trust paid
management fees to PMF of $3,803,950, $1,286,150 and $1,093,251 relating to the
Money Market Series, Intermediate Term Series and U.S. Treasury Money Market
Series, respectively. For the fiscal year ended November 30, 1992, the Trust
paid management fees to PMF of $4,455,034, $1,177,548 and $1,053,834 relating
to the Money Market Series, Intermediate Term Series and U.S. Treasury Money
Market Series respectively.

PMF has entered into the Subadvisory Agreement with PIC (the Subadviser).
The Subadvisory Agreement provides that PIC furnish investment advisory
services in connection with the management of the Trust. In connection
therewith, PIC is obligated to keep certain books and records of the Trust. PMF
continues to have responsibility for all investment advisory services pursuant
to the Management Agreement and supervises PIC's performance of those services.
PIC is reimbursed by PMF for the reasonable costs and expenses incurred by PIC
in furnishing those services.

B-10
<PAGE> 63

The Subadvisory Agreement was last approved by the Trustees, including all
of the Trustees who are not interested persons as defined in the Investment
Company Act, on May 2, 1994, and by the shareholders of each of the Money
Market Series and the Intermediate Term Series on April 28, 1988 and the
shareholders of the U.S. Treasury Money Market Series on November 26, 1991.

The Subadvisory Agreement provides that it will terminate in the event of
its assignment or upon the termination of the Management Agreement. The
Subadvisory Agreement may be terminated by the Trust, PMF or PIC upon not less
than 30 days' nor more than 60 days' written notice. The Subadvisory Agreement
provides that it will continue in effect for a period of more than two years
only so long as such continuance is specifically approved at least annually in
accordance with the requirements of the Investment Company Act applicable to
continuance of investment advisory contracts.

The Manager and the Subadviser are subsidiaries of The Prudential Insurance
Company of America (The Prudential) which, as of December 31, 1993, was one of
the largest financial institutions in the world and the largest insurance
company in North America. The Prudential has been engaged in the insurance
business since 1875. In July 1994, Institutional Investor ranked The Prudential
the second largest institutional money manager of the 300 largest money
management organizations in the United States as of December 31, 1993.

DISTRIBUTOR

Prudential Securities Incorporated (Prudential Securities or PSI), One
Seaport Plaza, New York, New York 10292, has entered into an agreement with the
Trust under which Prudential Securities acts as distributor for the
Intermediate Term Series. Prudential Securities is engaged in the securities
underwriting and securities and commodities brokerage business and is a member
of the New York Stock Exchange, other major securities and commodities
exchanges and the National Association of Securities Dealers, Inc. (NASD).
Prudential Securities is also engaged in the investment advisory business.
Prudential Securities is a wholly-owned subsidiary of Prudential Securities
Group Inc., which is an indirect, wholly-owned subsidiary of Prudential. The
services it provides to the Trust are discussed in the Intermediate Term
Series' Prospectus. See ``How the Trust is Managed--Distributor.''

Prudential Mutual Fund Distributors, Inc. (PMFD), One Seaport Plaza, New
York, New York 10292, has entered into an agreement with the Trust pursuant to
which PMFD serves as distributor for the Money Market Series and the U.S.
Treasury Money Market Series. PMFD is a wholly-owned subsidiary of PMF. The
services it provides to the Trust are described in the Money Market Series and
the U.S. Treasury Money Market Series Prospectuses. See ``How the Trust is
Managed--Distributor.''

DISTRIBUTION AND SERVICE PLANS. See ``How the Trust is Managed--Distributor''
in the prospectus of each Series.

During the fiscal year ended November 30, 1994, PMFD incurred distribution
expenses in the aggregate of $916,084 and $385,567 with respect to the Money
Market Series and the U.S. Treasury Money Market Series, respectively, all of
which was recovered through the distribution fee paid by each Series to PMFD.
It is estimated that of these amounts approximately $714,500 (78%) and $297,300
(77.1%) was spent on payment of account servicing fees to financial advisers
for the Money Market Series and U.S. Treasury Money Market Series,
respectively, and $201,500 (22%) and $88,300 (22.9%) on allocation of overhead
and other branch office distribution-related expenses for the Money Market
Series and U.S. Treasury Money Market Series, respectively. The term ``overhead
and other branch office distribution-related expenses'' represents (a) the
expenses of operating Prudential Securities' branch offices in connection with
the sale of shares of the series, including lease costs, the salaries and
employee benefits of operations and sales support personnel, utility costs,
communications costs and the costs of stationery and supplies, (b) the costs of
client sales seminars, (c) travel expenses of mutual fund sales coordinators to
promote the sale of shares of the series, and (d) other incidental expenses
relating to branch promotion of sales of the series. Reimbursable distribution
expenses do not include any direct interest or carrying charges.

For the fiscal year ended November 30, 1994, Prudential Securities
received $665,503 from the Intermediate Term Series under the Plan all
of which was spent on behalf of the Intermediate Term Series for the payment of
account servicing fees to financial advisers.

Pursuant to Rule 12b-1, the Distribution and Service Plan of the Money
Market Series and Distribution and Service Plan of the Intermediate Term Series
were approved by the vote of a majority of their outstanding voting securities
on April 28, 1988 and June 26, 1985, respectively, and the Distribution and
Service Plan of the U.S. Treasury Money Market Series was approved by a
majority of its outstanding voting securities on November 26, 1991
(collectively referred to as the Plans). The Plans were last approved by the
Trustees, including a majority of the Trustees who are not interested persons
of the Trust and who have no direct or indirect financial interest in the
operation of the Plans or in any agreements related to the Plans (the Rule
12b-1 Trustees), cast in person at a meeting called for the purpose of voting
on such Plans on May 2, 1994.

In each Distribution and Service Agreement, the Trust has agreed to
indemnify Prudential Securities or PMFD to the extent permitted by applicable
law against certain liabilities under the Securities Act of 1933, as amended.

Pursuant to the Plans, the Trustees are provided at least quarterly with
written reports of the amounts expended under the Plans and the purposes for
which such expenditures were made. The Trustees review such reports on a
quarterly basis.

B-11
<PAGE> 64

The Plans provide that they will continue in effect from year to year,
provided each such continuance is approved annually by a vote of the Trustees
in the manner described above. The Plans may not be amended to increase
materially the amount to be spent for the services described therein without
approval of the shareholders of the applicable Series, and all material
amendments of the Plans must also be approved by the Trustees in the manner
described above. Each Plan may be terminated at any time, without payment of
any penalty, by vote of a majority of the Rule 12b-1 Trustees, or by a vote of
a majority of the outstanding voting securities of the applicable Series (as
defined in the Investment Company Act). Each Plan will automatically terminate
in the event of its assignment (as defined in the Investment Company Act).

So long as the Plans are in effect, the selection and nomination of
Trustees who are not interested persons of the Trust shall be committed to the
discretion of the Trustees who are not interested persons. The Trustees have
determined that, in their judgment, there is a reasonable likelihood that the
Plans will benefit the Trust and its shareholders. In the Trustees' quarterly
review of the Plans, they consider the continued appropriateness and the level
of payments provided therein.

The Distribution Agreements provide that each shall terminate
automatically if assigned and that each may be terminated without penalty by
either party upon not more than 60 days' nor less than 30 days' written
notice.

Each Distribution Agreement was last approved by the Trustees, including
all of the Trustees who are not interested persons of the Trust and have no
direct or indirect financial interest in the operation of the Plans or the
Distribution Agreements on May 2,1994.

On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and
a limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition
or investment objectives. It was also alleged that the safety, potential
returns and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing properties
and aircraft leasing ventures. The SEC Order (i) included findings that PSI's
conduct violated the federal securities laws and that an order issued by the
SEC in 1986 requiring PSI to adopt, implement and maintain certain supervisory
procedures had not been complied with; (ii) directed PSI to cease and desist
from violating the federal securities laws and imposed a $10 million civil
penalty; and (iii) required PSI to adopt certain remedial measures including
the establishment of a Compliance Committee of its Board of Directors. Pursuant
to the terms of the SEC settlement, PSI established a settlement fund in the
amount of $330,000,000 and procedures, overseen by a court approved Claims
Administrator, to resolve legitimate claims for compensatory damages by
purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for that purpose. PSI's settlement with the state
securities regulators included an agreement to pay a penalty of $500,000 per
jurisdiction. PSI consented to a censure and to the payment of a $5,000,000
fine in settling the NASD action. In settling the above referenced matters, PSI
neither admitted nor denied the allegations asserted against it.

On January 18, 1994, PSI agreed to the entry of a Final Consent Order and
a Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and
other improper conduct resulting in pecuniary losses and other harm to
investors residing in Texas with respect to purchases and sales of limited
partnership interests during the period of January 1, 1980 through December 31,
1990. Without admitting or denying the allegations, PSI consented to a
reprimand, agreed to cease and desist from future violations, and to provide
voluntary donations to the State of Texas in the aggregate amount of
$1,500,000. The firm agreed to suspend the creation of new customer accounts,
the general solicitation of new accounts, and the offer for sale of securities
in or from PSI's North Dallas office to new customers during a period of twenty
consecutive business days, and agreed that its other Texas offices would be
subject to the same restrictions for a period of five consecutive business
days. PSI also agreed to institute training programs for its securities
salesmen in Texas.

On October 27, 1994, Prudential Securities Group, Inc. and PSI entered
into agreements with the United States Attorney deferring prosecution (provided
PSI complies with the terms of the agreement for three years) for any
alleged criminal activity related to the sale of certain limited partnership
programs from 1983 to 1990. In connection with these agreements, PSI agreed to
add the sum of $330,000,000 to the fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
Inspection Service. PSI further agreed to obtain a mutually acceptable outside
director to sit on the Board of Directors of PSG and the Compliance Committee
of PSI. The new director will also serve as an independent ``ombudsman'' whom
PSI employees can call anonymously with complaints about ethics and compliance.
Prudential Securities shall report any allegations or instances of criminal
conduct and material improprieties to the new director. The new director will
submit compliance reports which shall identify all such allegations or
instances of criminal conduct and material improprieties every three months for
a three-year period.

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Manager and PIC are responsible for decisions to buy and sell
securities for the Money Market Series, Intermediate Term Series and U.S.
Treasury Money Market Series, arranging the execution of portfolio security
transactions on each Series' behalf, and the selection of brokers and dealers
to effect the transactions. Purchases of portfolio securities are made from
dealers, underwriters and

B-12
<PAGE> 65

issuers; sales, if any, prior to maturity, are made to dealers and
issuers. Each Series does not normally incur any brokerage commission
expense on such transactions. The instruments purchased by the Series are
generally traded on a ``net'' basis with dealers acting as principal for their
own accounts without a stated commission, although the price of the security
usually includes a profit to the dealer. Securities purchased in underwritten
offerings include a fixed amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount. When securities are
purchased or sold directly from or to an issuer, no commissions or discounts
are paid.

The policy of each of the Series regarding purchases and sales of
securities is that primary consideration will be given to obtaining the most
favorable price and efficient execution of transactions.

The Trust paid no brokerage commissions for the fiscal years ended
November 30, 1992, 1993 and 1994.

SHAREHOLDER INVESTMENT ACCOUNT

Upon the initial purchase of shares of the Trust, a Shareholder Investment
Account is established for each investor under which a record of the shares
held is maintained by the Transfer Agent. If a share certificate is desired, it
must be requested in writing for each transaction. Certificates are issued only
for full shares and may be redeposited in the account at any time. There is no
charge to the investor for issuance of a certificate. Whenever a transaction
takes place in the Shareholder Investment Account, the shareholder will be
mailed a statement showing the transaction and the status of such account.

PROCEDURE FOR MULTIPLE ACCOUNTS

Special procedures have been designed for banks and other institutions that
wish to open multiple accounts. An institution may open a single master account
by filing an Application Form with Prudential Mutual Fund Services, Inc. (PMFS
or the Transfer Agent), Attention: Customer Service, P.O. Box 15005, New
Brunswick, New Jersey 08906, signed by personnel authorized to act for the
institution. Individual sub-accounts may be opened at the time the master
account is opened by listing them, or they may be added at a later date by
written advice or by filing forms supplied by the Trust. Procedures are
available to identify sub-accounts by name and number within the master account
name. The investment minimums set forth above are applicable to the aggregate
amounts invested by a group and not to the amount credited to each sub-account.

PMFS provides each institution with a written confirmation for each
transaction in sub-accounts. Further, PMFS provides, to each institution on a
monthly basis, a statement which sets forth for each master account its share
balance and income earned for the month. In addition, each institution receives
a statement for each individual account setting forth transactions in the
sub-account for the year-to-date, the total number of shares owned as of the
dividend payment date and the dividends paid for the current month, as well as
for the year-to-date.

Further information on the sub-accounting system and procedures is
available from the Transfer Agent, Prudential Securities or Prusec.

AUTOMATIC REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS

For the convenience of investors, all dividends and distributions are
automatically invested in full and fractional shares of the applicable Series
at net asset value. An investor may direct the Transfer Agent in writing not
less than 5 full business days prior to the payable date to have subsequent
dividends and/or distributions sent in cash rather than invested. In the case
of recently purchased shares for which registration instructions have not been
received on the record date, cash payment will be made directly to the dealer.
Any shareholder who receives a cash payment representing a dividend or
distribution may reinvest such dividend or distribution at net asset value by
returning the check or the proceeds to the Transfer Agent within 30 days after
the payment date. Such investment will be made at the net asset value per share
next determined after receipt of the check or proceeds by the Transfer Agent.

EXCHANGE PRIVILEGE

The Trust makes available to its Money Market Series, Intermediate Term
Series and U.S. Treasury Money Market Series shareholders the privilege of
exchanging their shares for shares of either Series and certain other
Prudential Mutual Funds, including one or more specified money market funds,
subject in each case to the minimum investment requirements of such funds.
Class A shares of such other Prudential Mutual Funds may also be exchanged for
Money Market Series, Intermediate Term Series and U.S. Treasury Money Market
Series shares. All exchanges are made on the basis of relative net asset value
next determined after receipt of an order in proper form. An exchange will be
treated as a redemption and purchase for tax purposes. Shares may be exchanged
for shares of another fund only if shares of such fund may legally be sold
under applicable state laws.

It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.

B-13
<PAGE> 66

Shareholders of the Trust may exchange their shares for Class A shares of
the Prudential Mutual Funds, and shares of the money market funds specified
below. No fee or sales load will be imposed upon the exchange.

The following money market funds participate in the Class A Exchange
Privilege:

Prudential California Municipal Fund
(California Money Market Series)

Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)

Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New York Money Market Series)
(New Jersey Money Market Series)

Prudential MoneyMart Assets
Prudential Tax-Free Money Fund

Shareholders of The Trust may not exchange their shares for Class B or
Class C shares of the Prudential Mutual Funds or shares of Prudential Special
Money Market Fund, a money market fund, except that shares acquired prior to
January 22, 1990 subject to a contingent deferred sales charge can be exchanged
for Class B shares.

Additional details about the Exchange Privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Trust's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on sixty days notice, and any fund, including the
Trust, or the Distributor, has the right to reject any exchange application
relating to such fund's shares.

DOLLAR COST AVERAGING

Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more
shares when the price is low and fewer shares when the price is high. The
overall cost is lower than it would be if a constant number of shares were
bought at set intervals.

Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $4,800 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2007, the cost of four years at a private
college could reach $163,000 and over $97,000 at a public university.(1)

The following chart shows how much you would need in monthly
investments to achieve specified lump sums to finance your investment goals.(2)

<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
--------------------------------- -------- -------- -------- --------

<S> <C> <C> <C> <C>
25 Years......................... $ 110 $ 165 $ 220 $ 275
20 Years......................... 176 264 352 440
15 Years......................... 296 444 592 740
10 Years......................... 555 833 1,110 1,388
5 Years......................... 1,371 2,057 2,742 3,428

</TABLE>

See ``Automatic Savings Accumulation Plan.''

(1) Source information concerning the costs of education at public
universities is available from The College Board Annual Survey of Colleges,
1992. Information about the costs of private colleges is from the Digest of
Education Statistics, 1992; The National Center for Educational Statistics; and
the U.S. Department of Education. Average costs for private institutions
include tuition, fees, room and board.

(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Fund. The
investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than their original
cost.

B-14
<PAGE> 67

AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)

Under ASAP, an investor may arrange to have a fixed amount automatically
invested in any Series' shares each month by authorizing his or her bank
account or Prudential Securities Account (including a Command Account) to be
debited to invest specified dollar amounts in shares of that Series. The
investor's bank must be a member of the Automatic Clearing House System. Share
certificates are not issued to ASAP participants.

Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.

SYSTEMATIC WITHDRAWAL PLAN

A systematic withdrawal plan is available for shareholders having shares of
the Trust held through Prudential Securities or the Transfer Agent. Such
withdrawal plan provides for monthly or quarterly checks in any amount, except
as provided below, up to the value of the shares in the shareholder's account.

In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares of the
applicable series at net asset value on shares held under this plan. See
``Shareholder Investment Account-Automatic Reinvestment of Dividends and
Distributions.''

Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may
be terminated at any time, and the Distributor reserves the right to initiate a
fee of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.

Withdrawal payments should not generally be considered as dividends, yield
or income. If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted. Furthermore, each withdrawal constitutes a
redemption of shares, and any gain or loss realized must generally be
recognized for federal income tax purposes. Each shareholder should consult his
or her own tax adviser with regard to the tax consequences of the plan,
particularly if used in connection with a retirement plan.

TAX-DEFERRED RETIREMENT PLANS

Various tax-deferred retirement plans, including a 401(k) Plan,
self-directed individual retirement accounts and ``tax-sheltered accounts''
under Section 403(b)(7) of the Internal Revenue Code are available through the
Distributor. These plans are for use by both self-employed individuals and
corporate employers. These plans permit either self-direction of accounts by
participants, or a pooled account arrangement. Information regarding the
establishment of these plans, the administration, custodial fees and other
details are available from Prudential Securities or the Transfer Agent.

Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.

INDIVIDUAL RETIREMENT ACCOUNTS

An individual retirement account (IRA) permits the deferral of federal
income tax on income earned in the account until the earnings are withdrawn.
The following chart represents a comparison of the earnings in a personal
savings account with those in an IRA, assuming a $2,000 annual contribution, an
8% rate of return and a 39.6% federal income tax bracket and shows how much more
retirement income can accumulate within an IRA as opposed to a taxable
individual savings account.

TAX-DEFERRED COMPOUNDING(1)
<TABLE>
<CAPTION>
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
-------------- -------- --------

<S> <C> <C>
10 years $ 26,165 $ 31,291
15 years 44,675 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692

</TABLE>

- ------------------

(1)The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings
in the IRA account will be subject to tax when withdrawn from the account.

B-15
<PAGE> 68

NET ASSET VALUE

MONEY MARKET SERIES AND U.S. TREASURY MONEY MARKET SERIES

Amortized Cost Valuation. The Money Market Series and the U.S. Treasury
Money Market Series use the amortized cost method to determine the value of
their portfolio securities in accordance with regulations of the Securities and
Exchange Commission. The amortized cost method involves valuing a security at
its cost and amortizing any discount or premium over the period until maturity.
The method does not take into account unrealized capital gains and losses which
may result from the effect of fluctuating interest rates on the market value of
the security.

With respect to the Money Market Series and the U.S. Treasury Money Market
Series, the Trustees have determined to maintain a dollar-weighted average
maturity of 90 days or less, to purchase instruments having remaining
maturities of thirteen months or less and to invest only in securities
determined by the investment adviser under the supervision of the Trustees to
present minimal credit risks and to be of eligible quality in accordance with
the provisions of Rule 2a-7 of the Investment Company Act. The Trustees have
adopted procedures designed to stabilize, to the extent reasonably possible,
both Series' price per share as computed for the purpose of sales and
redemptions at $1.00. Such procedures will include review of the Series'
portfolio holdings by the Trustees, at such intervals as they may deem
appropriate, to determine whether the Series' net asset value calculated by
using available market quotations deviates from $1.00 per share based on
amortized cost. The extent of any deviation will be examined by the Trustees. If
such deviation exceeds 1/2 of 1%, the Trustees will promptly consider what
action, if any, will be initiated. In the event the Trustees determine that a
deviation exists which may result in material dilution or other unfair results
to prospective investors or existing shareholders, the Trustees will take such
corrective action as they consider necessary and appropriate, including the sale
of portfolio instruments prior to maturity to realize capital gains or losses or
to shorten average portfolio maturity, the withholding of dividends, redemptions
of shares in kind, or the use of available market quotations to establish a net
asset value per share.

INTERMEDIATE TERM SERIES

In determining the value of the assets of the Intermediate Term Series, the
value of each U.S. Government security for which quotations are available will
be based on the valuation provided by an independent pricing service. Pricing
services consider such factors as security prices, yields, maturities, call
features, ratings and developments relating to specific securities in arriving
at securities valuations. Securities for which market quotations are not
readily available are valued by appraisal at their fair value as determined in
good faith by the Manager under procedures established under the general
supervision and responsibility of the Trustees.

Short-term investments which mature in 60 days or less are valued at
amortized cost, if their term to maturity from date of purchase was 60 days or
less, or by amortizing their value on the 61st day prior to maturity if their
term to maturity when acquired by the Intermediate Series was more than 60
days, unless this is determined not to represent fair value by the Trustees.

TIME NET ASSET VALUE IS CALCULATED

The Trust will calculate its net asset value at 4:15 P.M., New York time,
for the Intermediate Term Series and at 4:30 P.M. for the Money Market Series
and U.S. Treasury Money Market Series, on each day the New York Stock Exchange
is open for trading except on days on which no orders to purchase, sell or
redeem series shares have been received or days on which changes in the value
of a series' securities do not affect net asset value. In the event the New York
Stock Exchange closes early on any business day, the net asset value of the
series' shares shall be determined at a time between such closing and 4:15 or
4:30, New York time, as appropriate.

PERFORMANCE INFORMATION

MONEY MARKET SERIES AND U.S. TREASURY MONEY MARKET SERIES--CALCULATION OF YIELD

The Money Market Series and U.S. Treasury Money Market Series will each
prepare a current quotation of yield from time to time. The yield quoted will
be the simple annualized yield for an identified seven calendar day period. The
yield calculation will be based on a hypothetical account having a balance of
exactly one share at the beginning of the seven-day period. The base period
return will be the change in the value of the hypothetical account during the
seven-day period, including dividends declared on any shares purchased with
dividends on the shares but excluding any capital changes. The yield will vary
as interest rates and other conditions affecting money market instruments
change. Yield also depends on the quality, length of maturity and type of
instruments in the Money Market Series and U.S. Treasury Money Market Series'
portfolios and their operating expenses. The Money Market Series and U.S.
Treasury Money Market Series may also each prepare an effective annual yield
computed by compounding the unannualized seven-day period return as follows: by
adding 1 to the unannualized seven-day period return, raising the sum to a power
equal to 365 divided by 7, and subtracting 1 from the result.

(365/7)
Effective yield = [(base period return + 1) ]-1

B-16
<PAGE> 69

The U.S. Treasury Money Market Series may also calculate the tax equivalent
yield over a 7-day period. The tax equivalent yield will be determined by first
computing the current yield as discussed above. The Series will then determine
what portion of the yield is attributable to securities, the income of which is
exempt for state and local income tax purposes. This portion of the yield will
then be divided by one minus the maximum state tax rate of individual taxpayers
and then added to the portion of the yield that is attributable to other
securities.

Comparative performance information may be used from time to time in
advertising or marketing the Money Market Series' and U.S. Treasury Money Market
Series' shares, including data from Lipper Analytical Services, Inc., Donoghue's
Money Fund Report, The Bank Rate Monitor, other industry publications, business
periodicals, rating services and market indices.

The Money Market Series' and U.S. Treasury Money Market Series' yields
fluctuate, and annualized yield quotations are not a representation by the Money
Market Series or U.S. Treasury Money Market Series as to what an investment in
the Money Market Series and U.S. Treasury Money Market Series will actually
yield for any given period. Yield for the Money Market Series and U.S. Treasury
Money Market Series will vary based on a number of factors including changes in
market conditions, the level of interest rates and the level of each series'
income and expenses.

INTERMEDIATE TERM SERIES--CALCULATION OF YIELD AND TOTAL RETURN

YIELD. The Intermediate Term Series may from time to time advertise its
yield as calculated over a 30-day period. Yield will be computed by dividing the
Intermediate Term Series' net investment income per share earned during this
30-day period by the net asset value per share on the last day of this period.
Yield is calculated according to the following formula:

a - b (6)
YIELD = 2 [( ----- + 1) - 1]
cd

Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the net asset value per share on the last day of the period.

Yield fluctuates and an annualized yield quotation is not a representation
by the Trust as to what an investment in the Intermediate Term Series will
actually yield for any given period.

The Intermediate Term Series' 30-day yield for the period ended November
30, 1994 was 6.52%.

AVERAGE ANNUAL TOTAL RETURN. The Intermediate Term Series may from time to
time advertise its average annual total return. See ``How the Trust Calculates
Performance'' in the Prospectus.

Average annual total return is computed according to the following formula:

(n)
P(1+T) = ERV

Where: P= a hypothetical initial payment of $1,000.
T= average annual total return.
n= number of years.
ERV= Ending Redeemable Value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year periods.

Average annual total return does not take into account any federal or
state income taxes that may be payable upon redemption.

The Intermediate Term Series' average annual total return for the one, five
and ten year periods ended November 30, 1994 was -2.58%, 6.29% and 8.22%,
respectively.

AGGREGATE TOTAL RETURN. The Intermediate Term Series may also advertise its
aggregate total return. See ``How the Trust Calculates Performance'' in the
Prospectus.

Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:

ERV-P
-------
P

Where: P= a hypothetical initial payment of $1,000.
ERV= Ending Redeemable Value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical
$1,000 investment made at the beginning of the 1, 5 or 10
year periods.

B-17

<PAGE> 70

Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption.

The Intermediate Term Series' aggregate total return for the one, five and
ten year periods ended November 30, 1994 was -2.58%, 35.64% and 120.26%,
respectively.

TAXES

Each series of the Trust is treated as a separate entity for federal
income tax purposes and each has elected to qualify and intends to remain
qualified as a regulated investment company under the Internal Revenue Code of
1986, as amended (the Internal Revenue Code). If each series qualifies as a
regulated investment company, it will not be subject to federal income taxes on
the taxable income it distributes to shareholders, provided at least 90% of its
net investment income and net short-term capital gains earned in the taxable
year is so distributed. To qualify for this treatment, each series must, among
other things, (a) derive at least 90% of its gross income (without offset for
losses from the sale or other disposition of securities or foreign currencies)
from dividends, interest, payments with respect to securities loans, gains from
the sale or other disposition of securities or foreign currencies and certain
financial futures, options and forward contracts; (b) derive less than 30% of
its gross income (without offset for losses from the sale or other disposition
of securities or foreign currencies) from the gains on the sale or other
disposition of securities held for less than three months; and (c) diversify its
holdings so that, at the end of each quarter of the taxable year, (i) at least
50% of the value of its assets is represented by cash, U.S. Government
securities and other securities limited in respect of any one issuer to an
amount no greater than 5% of its assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its assets
is invested in the securities of any one issuer (other than U.S. Government
securities). The performance and tax qualification of one series will have no
effect on the federal income tax liability of shareholders of the other series.

The Internal Revenue Code imposes a 4% nondeductible excise tax to the
extent any series fails to meet certain minimum distribution requirements by
the end of each calendar year. For this purpose, dividends declared in October,
November and December payable to shareholders of record on a specified date in
October, November and December and paid in the following January will be treated
as having been paid by the Trust and received by shareholders in such prior
year. Under this rule, a shareholder may be taxed in one year on dividends or
distributions actually received in January of the following year.

See ``Taxes, Dividends and Distributions'' in the Prospectus of each
series.

CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT AND
INDEPENDENT ACCOUNTANTS

State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, has been retained to act as Custodian of the Trust's
investments and in such capacity maintains certain financial and accounting
books and records pursuant to an agreement with the Trust.

Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison,
New Jersey 08837, serves as Transfer and Dividend Disbursing Agent and in those
capacities maintains certain books and records for the Trust. PMFS is a
wholly-owned subsidiary of PMF. PMFS provides customary transfer agency services
to the Trust, including the handling of shareholder communications, the
processing of shareholder transactions, the maintenance of shareholder account
records, payment of dividends and distributions and related functions. For these
services, PMFS receives an annual fee per shareholder account, a new account
set-up fee for each manually established account and a monthly inactive zero
balance account fee per shareholder account. PMFS is also reimbursed for its
out-of-pocket expenses, including but not limited to postage, stationery,
printing, allocable communications and other costs. For the fiscal year ended
November 30, 1994, the Intermediate Term Series, Money Market Series and U.S.
Treasury Money Market Series incurred fees of $267,000, $1,066,000 and $79,000,
respectively, for the services of PMFS.

Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York,
serves as the Trust's independent accountants and in that capacity audits the
Trust's annual financial statements.

B-18
<PAGE> 71
PRUDENTIAL GOVERNMENT SECURITIES TRUST PORTFOLIO OF INVESTMENTS
MONEY MARKET SERIES NOVEMBER 30, 1994

<TABLE>
<CAPTION>
- --------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------
<S> <C>
Federal Agricultural Mortgage
Corporation--1.0%
$ 6,600 5.32%, 1/3/95................ $ 6,567,814
------------

FEDERAL FARM CREDIT BANK--10.9%

4,000 8.30%, 1/20/95............... 4,013,696
5,735 5.65%, 1/24/95............... 5,686,396
1,000 5.60%, 2/14/95............... 1,003,184
16,600 5.62%, 2/23/95, F.R.N........ 16,589,790
1,500 5.22%, 3/22/95............... 1,475,857
2,000 5.27%, 3/22/95............... 1,967,502
3,150 5.35%, 3/24/95............... 3,097,102
6,700 5.85%, 5/1/95................ 6,700,000
19,000 5.375%, 8/1/95............... 18,984,296
9,900 6.56%, 11/14/95.............. 9,886,616
------------
69,404,439
------------

Federal Home Loan Bank--9.3%

15,000 4.72%, 12/8/94, F.R.N........ 14,967,849
1,000 8.05%, 12/26/94.............. 1,003,019
3,945 5.32%, 1/5/95................ 3,924,596
13,200 5.32%, 1/12/95............... 13,118,072
7,300 8.40%, 1/25/95............... 7,351,684
8,500 3.46%, 2/3/95................ 8,497,243
10,100 5.625%, 8/23/95.............. 10,096,333
------------
58,958,796
------------

Federal Home Loan Mortgage
Corporation--9.0%

12,000 4.75%, 12/9/94............... 11,987,333
14,000 5.32%, 1/4/95................ 13,929,658
7,000 5.30%, 1/5/95................ 6,963,931
10,000 5.64%, 1/23/95............... 9,916,967
5,000 5.55%, 2/2/95................ 4,951,437
10,000 5.54%, 2/3/95................ 9,901,511
------------
57,650,837
------------

Federal National Mortgage
Association--14.4%

$ 2,340 8.65%, 12/12/94.............. $ 2,341,927
1,300 9.00%, 1/10/95............... 1,304,139
5,125 5.17%, 1/25/95............... 5,084,520
11,000 11.50%, 2/10/95.............. 11,131,883
7,700 5.105%, 3/9/95............... 7,592,993
8,000 5.22%, 3/20/95............... 7,873,560
15,000 5.60%, 4/18/95, F.R.N........ 14,678,000
27,000 5.57%, 6/1/95, F.R.N......... 26,994,303
15,000 5.72%, 8/25/95............... 15,000,000
------------
92,001,325
------------

Student Loan Marketing
Association--11.2%

10,500 5.59%, 12/8/94, F.R.N........ 10,499,959
3,105 5.35%, 12/30/94, F.R.N....... 3,105,682
9,790 5.89%, 12/30/94, F.R.N....... 9,792,054
9,000 5.89%, 1/16/95, F.R.N........ 9,010,953
5,000 6.19%, 3/23/95, F.R.N........ 5,008,293
6,750 6.19%, 3/27/95, F.R.N........ 6,760,843
10,000 5.81%, 4/16/95, F.R.N........ 10,000,000
17,000 5.94%, 8/7/95, F.R.N......... 17,034,305
------------
71,212,089
------------

REPURCHASE AGREEMENTS+--46.4%

9,908 Joint Repurchase Agreement
Account
5.692%, 12/1/94 (Note 5)... 9,908,000

</TABLE>

See Notes to Financial Statements.

B-19
<PAGE> 72

PRUDENTIAL GOVERNMENT SECURITIES TRUST
MONEY MARKET SERIES

$ 8,000 Merrill Lynch, Pierce, Fenner
& Smith, Inc., 5.625%,
dated 11/29/94, due 12/1/94
in the amount of $8,002,500
(cost $8,000,000; the value
of the collateral including
accrued interest is
$8,160,353)................ $ 8,000,000

5,000 Nomura Securities
International, Inc., 5.60%,
dated 11/30/94, due 12/2/94
in the amount of $5,001,556
(cost $5,000,000; the value
of the collateral including
accrued interest is
$5,097,150)................ 5,000,000

57,503 Goldman Sachs & Co., 5.55%,
dated 11/28/94, due 12/5/94
in the amount of
$57,565,055 (cost
$57,503,000; the value of
the collateral including
accrued interest is
$58,653,060)............... 57,503,000

56,000 Merrill Lynch, Pierce, Fenner
& Smith, Inc., 5.55%, dated
11/28/94, due 12/5/94 in
the amount of $56,060,433
(cost $56,000,000; the
value of the collateral
including accrued interest
is $57,140,688)............ 56,000,000

17,000 Bear, Stearns & Co., 5.60%,
dated 11/28/94, due 12/5/94
in the amount of
$17,018,511 (cost
$17,000,000; the value of
the collateral including
accrued interest is
$17,288,501)............... 17,000,000

$ 36,234 Bear, Stearns & Co., 5.57%,
dated 11/29/94, due 12/6/94
in the amount of
$36,273,243 (cost
$36,234,000; the value of
the collateral including
accrued interest is
$36,905,875)............... $ 36,234,000

58,000 Nomura Securities
International, Inc., 5.63%,
dated 11/30/94, due 12/7/94
in the amount of
$58,063,494 (cost
$58,000,000; the value of
the collateral including
accrued interest is
$59,160,000)............... 58,000,000

10,000 CS First Boston Corp., 5.02%,
dated 9/12/94, due 12/30/94
in the amount of
$10,151,994 (cost
$10,000,000; the value of
the collateral including
accrued interest is
$10,302,617)............... 10,000,000

7,810 CS First Boston Corp., 5.17%,
dated 10/3/94, due 12/30/94
in the amount of $7,908,701
(cost $7,810,000; the value
of the collateral including
accrued interest is
$8,039,946)................ 7,810,000

14,946 Lehman, Inc., 5.50%, dated
11/3/94, due 1/3/95 in the
amount of $15,085,288 (cost
$14,946,000; the value of
the collateral including
accrued interest is
$15,248,035)............... 14,946,000

</TABLE>

See Notes to Financial Statements.

B-20
<PAGE> 73

PRUDENTIAL GOVERNMENT SECURITIES TRUST
MONEY MARKET SERIES

$ 15,000 Lehman, Inc., 5.55%, dated
10/6/94, due 1/6/95 in the
amount of $15,212,750 (cost
$15,000,000; the value of
the collateral including
accrued interest is
$15,300,621)............... $ 15,000,000
------------
295,401,000
------------

TOTAL INVESTMENTS--102.2%

(amortized cost
$651,196,300*)............. 651,196,300
Liabilities in excess of
other
assets--(2.2%)............. (13,852,853)
------------
NET ASSETS--100%............. $637,343,447
============

</TABLE>

- ---------------
F.R.N.--Floating Rate Note.

* Federal income tax basis of portfolio securities
is the same as for financial reporting purposes.
+ Repurchase Agreements are collateralized by U.S.
Treasury or Federal agency obligations.

See Notes to Financial Statements.

B-21
<PAGE> 74

PRUDENTIAL GOVERNMENT SECURITIES TRUST PORTFOLIO OF INVESTMENTS
INTERMEDIATE TERM SERIES NOVEMBER 30, 1994

<TABLE>
<CAPTION>
- --------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------
<S> <C>

LONG-TERM INVESTMENTS--85.2%
FEDERAL HOME LOAN MORTGAGE
CORPORATION

$ 73 8.00%, 6/1/24................ $ 69,521
------------
Federal National Mortgage
Association
21 7.50%, 10/1/01............... 20,019
------------

GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION--7.6%

6,671 6.00%, 7/20/24............... 6,372,996
4,052 6.00%, 8/20/24............... 3,870,503
8,478 6.00%, 9/20/24............... 8,099,204
------------
18,342,703
------------

UNITED STATES TREASURY NOTES--77.6%

41,000* 4.00%, 1/31/96............... 39,603,540
17,000* 4.75%, 2/15/97............... 16,057,010
16,000* 8.50%, 4/15/97............... 16,329,920
99,000 5.125%, 11/30/98............. 90,120,690
6,000 7.25%, 8/15/04............... 5,725,320
20,000 7.875%, 11/15/04............. 19,867,969
------------
187,704,449
------------
Total long-term investments
(cost $209,737,890)........ 206,136,692
------------

SHORT-TERM INVESTMENT--0.6%

Joint Repurchase Agreement Account,
1,439 5.692%, 12/1/94 (Note 5)
(cost $1,439,000).......... 1,439,000
------------
TOTAL INVESTMENTS--85.8%
(cost $211,176,890; Note
4)......................... 207,575,692
Other assets in excess of
liabilities--14.2%......... 34,404,415
------------
NET ASSETS--100%............. $241,980,107
============
</TABLE>

- ---------------
* Asset segregated for dollar rolls.

See Notes to Financial Statements.

B-22

<PAGE> 75

PRUDENTIAL GOVERNMENT SECURITIES TRUST PORTFOLIO OF INVESTMENTS
U.S. TREASURY MONEY MARKET SERIES NOVEMBER 30, 1994

$ 6,918 4.91%, 12/22/94.............. $ 6,898,186
22,325 4.95%, 12/22/94.............. 22,260,536
14,816 4.97%, 12/22/94.............. 14,773,046
50,000 5.06%, 12/22/94.............. 49,852,417
850 5.075%, 12/22/94............. 847,484
5,890 5.08%, 12/22/94.............. 5,872,546
13,565 5.09%, 12/22/94.............. 13,524,723
53,697 5.11%, 12/22/94.............. 53,536,938
3,000 5.13%, 12/22/94.............. 2,991,022
8,681 5.135%, 12/22/94............. 8,654,997
3,319 5.165%, 12/22/94............. 3,309,000
11,111 5.125%, 2/16/95.............. 10,989,204
10,000 4.975%, 4/6/95............... 9,825,875
------------
203,335,974
------------

UNITED STATES TREASURY NOTES--31.1%

26,345 4.625%, 12/31/94............. 26,327,730
28,500 5.50%, 2/15/95............... 28,506,087
1,033 7.75%, 2/15/95............... 1,037,824
24,020 3.875%, 2/28/95.............. 23,930,750
11,763 5.875%, 5/15/95.............. 11,753,357
------------
91,555,748
------------

TOTAL INVESTMENTS--100.3%
(amortized cost
$294,891,722*)............. 294,891,722
Liabilities in excess of
other
assets--(0.3%)............. (907,475)
------------
NET ASSETS--100%............. $293,984,247
============
</TABLE>

- ---------------
* Federal income tax basis of portfolio securities is the same as for
financial reporting purposes.

See Notes to Financial Statements.

B-23
<PAGE> 76

PRUDENTIAL GOVERNMENT SECURITIES TRUST
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1994

<TABLE>
<CAPTION>
US TREASURY
MONEY MONEY
MARKET INTERMEDIATE MARKET
SERIES TERM SERIES SERIES
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Investments, at value (cost $651,196,300, $211,176,890 and
$294,891,722, respectively)................................... $651,196,300 $207,575,692 $294,891,722
Cash............................................................ -- -- 4,828
Interest receivable............................................. 3,328,495 1,507,746 1,260,514
Receivable for investments sold................................. -- 54,380,133 --
Receivable for Series shares sold............................... 2,580,434 37,209 1,231,273
Fees receivable on securities loaned............................ -- 17,196 --
Deferred expenses and other assets.............................. 13,457 10,022 15,725
------------ ------------ ------------
Total assets................................................ 657,118,686 263,527,998 297,404,062
------------ ------------ ------------

LIABILITIES
Payable for investments purchased............................... -- 19,989,792 --
Payable for Series shares reacquired............................ 18,798,972 1,061,352 2,974,191
Dividends payable............................................... 507,646 355,635 231,861
Due to Manager.................................................. 211,049 81,260 92,141
Accrued expenses and other liabilities.......................... 222,306 29,452 105,759
Due to Distributors............................................. 35,266 30,400 15,863
------------ ------------ ------------
Total liabilities........................................... 19,775,239 21,547,891 3,419,815
------------ ------------ ------------
NET ASSETS...................................................... $637,343,447 $241,980,107 $293,984,247
============ ============ ============
Net assets were comprised of:
Shares of beneficial interest, at par ($.01 per share).......... $ 6,373,434 $ 263,903 $ 2,939,842
Paid-in capital in excess of par................................ 630,970,013 326,069,502 291,044,405
------------ ------------ ------------
637,343,447 326,333,405 293,984,247
Undistributed net investment income............................. -- 2,133,743 --
Accumulated net realized losses................................. -- (82,885,843) --
Net unrealized depreciation of investments...................... -- (3,601,198) --
------------ ------------ ------------
NET ASSETS, NOVEMBER 30, 1994................................... $637,343,447 $241,980,107 $293,984,247
============ ============ ============
Shares of beneficial interest issued and outstanding............ 637,343,447 26,390,334 293,984,247
============ ============ ============
Net asset value................................................. $1.00 $9.17 $1.00
===== ====== =====

</TABLE>

See Notes to Financial Statements.

B-24

<PAGE> 77

PRUDENTIAL GOVERNMENT SECURITIES TRUST
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1994

<TABLE>
<CAPTION>
US TREASURY
MONEY MONEY
MARKET INTERMEDIATE MARKET
SERIES TERM SERIES SERIES
----------- ------------ -----------
<S> <C> <C> <C>
NET INVESTMENT INCOME
Income
Interest...................................................... $28,983,835 $19,425,626 $11,818,912
Income from securities loaned................................. -- 22,315 --
----------- ----------- -----------
28,983,835 19,447,941 11,818,912
----------- ----------- -----------
Expenses
Management fee................................................ 2,931,469 1,229,526 1,233,814
Distribution fee.............................................. 916,084 665,503 385,567
Transfer agent's fees and expenses............................ 1,303,000 384,000 92,000
Custodian's fees and expenses................................. 163,000 120,000 41,000
Registration fees............................................. 112,000 61,000 69,000
Reports to shareholders....................................... 105,000 57,000 28,000
Audit fee..................................................... 38,000 35,000 35,000
Trustees' fees................................................ 15,200 15,200 15,200
Insurance expense............................................. 23,000 8,000 13,000
Legal fees.................................................... 7,000 16,000 4,000
Amortization of deferred organization expenses................ -- -- 7,932
Miscellaneous................................................. 3,859 4,101 2,687
----------- ----------- -----------
Total expenses.............................................. 5,617,612 2,595,330 1,927,200
----------- ----------- -----------
Net investment income........................................... 23,366,223 16,852,611 9,891,712
----------- ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on investment transactions............. 84,741 (15,205,293) 55,159
Net change in unrealized depreciation of investments............ -- (10,351,690) --
----------- ----------- -----------
Net gain (loss) on investments.................................. 84,741 (25,556,983) 55,159
----------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS...................................................... $23,450,964 $(8,704,372) $ 9,946,871
=========== =========== ===========

</TABLE>

See Notes to Financial Statements.
B-25
<PAGE> 78

PRUDENTIAL GOVERNMENT SECURITIES TRUST
STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
US TREASURY
MONEY MARKET INTERMEDIATE MONEY MARKET
SERIES TERM SERIES SERIES
--------------------------------- ----------------------------- ---------------------------------

YEAR ENDED NOVEMBER 30,
-----------------------------------------------------------------------------------------------------
1994 1993 1994 1993 1994 1993
--------------- --------------- ------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE)
IN NET ASSETS
Operations
Net investment income... $ 23,366,223 $ 24,381,889 $ 16,852,611 $ 21,862,611 $ 9,891,712 $ 6,812,533
Net realized gain (loss)
on investment
transactions.......... 84,741 240,813 (15,205,293) (234,826) 55,159 141,643
Net change in unrealized
appreciation/
depreciation
of investments........ -- -- (10,351,690) 3,085,195 -- --
--------------- --------------- ------------- ------------- --------------- ---------------
Net increase (decrease)
in net assets
resulting from
operations............ 23,450,964 24,622,702 (8,704,372) 24,712,980 9,946,871 6,954,176
--------------- --------------- ------------- ------------- --------------- ---------------
Net equalization (debits)
credits................. -- -- (3,335) 4,795 -- --
--------------- --------------- ------------- ------------- --------------- ---------------
Dividends and
distributions to
shareholders:
Dividends to
shareholders.......... (23,450,964) (24,622,702) (16,669,920) (21,877,946) (9,946,871) (6,954,176)
Tax return of capital
distribution.......... -- -- (3,852,402) (702,835) -- --
--------------- --------------- ------------- ------------- --------------- ---------------
Total dividends and
distributions to
shareholders............ (23,450,964) (24,622,702) (20,522,322) (22,580,781) (9,946,871) (6,954,176)
--------------- --------------- ------------- ------------- --------------- ---------------
Series share transactions*
Net proceeds from shares
subscribed............ 1,978,695,920 2,705,725,541 86,065,731 191,340,556 1,582,592,660 1,255,246,290
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions......... 22,318,739 23,600,594 14,086,719 14,618,822 9,338,121 6,581,355
Cost of shares
reacquired............ (2,283,173,810) (2,836,010,964) (176,886,461) (163,603,524) (1,582,924,124) (1,210,449,881)
--------------- --------------- ------------- ------------- --------------- ---------------
Net increase (decrease)
in net assets from
Series share
transactions.......... (282,159,151) (106,684,829) (76,734,011) 42,355,854 9,006,657 51,377,764
--------------- --------------- ------------- ------------- --------------- ---------------
Total increase
(decrease).............. (282,159,151) (106,684,829) (105,964,040) 44,492,848 9,006,657 51,377,764
NET ASSETS
Beginning of year....... 919,502,598 1,026,187,427 347,944,147 303,451,299 284,977,590 233,599,826
--------------- --------------- ------------- ------------- --------------- ---------------
End of year............. $ 637,343,447 $ 919,502,598 $ 241,980,107 $ 347,944,147 $ 293,984,247 $ 284,977,590
=============== =============== ============= ============= =============== ===============
</TABLE>

- ---------------
*At $1.00 per share for the Money Market Series and the U.S. Treasury Money
Market Series.

See Notes to Financial Statements.

B-26
<PAGE> 79

PRUDENTIAL GOVERNMENT SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS

Prudential Government Securities Trust (the ``Fund'') is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The Fund consists of three series--the Money Market Series, the
Intermediate Term Series and the U.S. Treasury Money Market Series; the monies
of each series are invested in separate, independently managed portfolios.

NOTE 1. SIGNIFICANT
ACCOUNTING POLICIES

The following is a summary of the significant accounting policies followed by
the Fund in the preparation of its financial statements.

SECURITIES VALUATIONS: The Money Market Series and U.S. Treasury Money
Market Series value portfolio securities at amortized cost, which approximates
market value. The amortized cost method of valuation involves valuing a security
at its cost on the date of purchase and thereafter assuming a constant
amortization to maturity of any discount or premium.

For the Intermediate Term Series, the Trustees have authorized the use of an
independent pricing service to determine valuations. The pricing service
considers such factors as security prices, yields, maturities, call features,
ratings and developments relating to specific securities in arriving at
securities valuations. When market quotations are not readily available, a
security is valued by appraisal at its fair value as determined in good faith
under procedures established under the general supervision and responsibility
of the Trustees. Short-term securities which mature in more than 60 days are
valued at current market quotations. Short-term securities which mature in 60
days or less are valued at amortized cost.

In connection with transactions in repurchase agreements, the Fund's
custodian or designated subcustodians, as the case may be under triparty
repurchase agreements, takes possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. If the seller defaults and the value
of the collateral declines or if bankruptcy proceedings are commenced with
respect to the seller of the security, realization of the collateral by the
Fund may be delayed or limited.

SECURITIES LENDING: The Intermediate Term Series may lend its U.S.
Government securities to broker-dealers or government securities dealers. The
Fund's policy is to receive collateral on each loan at least equal, at all
times, to the market value of the securities loaned. The Series may bear the
risk of delay in recovery of, or even loss of rights in, the collateral should
the borrower of the securities fail financially. The Series receives
compensation for lending its securities in the form of fees or it retains a
portion of interest on the investment of any cash received as collateral. The
Series also continues to receive interest on the securities loaned, and any gain
or loss in the market price of the securities loaned that may occur during the
term of the loan will be for the account of the Series.

SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of portfolio
securities are calculated on the identified cost basis. Interest income is
recorded on the accrual basis. The Money Market and the U.S. Treasury Money
Market Series' amortize discounts and premiums on purchases of portfolio
securities as adjustments to income. For the Intermediate Term Series, gains or
losses resulting from discounts or premiums on purchased securities are treated
as capital gains or losses when realized upon disposal.

DOLLAR ROLLS: The Intermediate Term Series enters into dollar roll
transactions in which the Series sells securities for delivery in the current
month, realizing a gain or loss, and simultaneously contracts to repurchase
somewhat similar (same type, coupon and maturity) securities on a specified
future date. During the roll period the Intermediate Term Series forgoes
principal and interest paid on the securities. The Series is compensated by the
interest earned on the cash proceeds of the initial sale and by the lower
repurchase price at the future date. The difference between the sale proceeds
and the lower repurchase price is taken into income. The Intermediate Term
Series maintains a segregated account, the dollar value of which is equal to its
obligations in respect of dollar rolls.

FEDERAL INCOME TAXES: For federal income tax purposes, each series of the Fund
is treated as a separate taxable entity. It is each Series' policy to continue
to meet the requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable net income to its
shareholders. Therefore, no federal income tax provision is required.

EQUALIZATION: The Intermediate Term Series follows the accounting
practice known as equalization by which a portion of the proceeds from sales and
costs of reacquisitions of its shares, equivalent on a per share basis to the
amount of distributable net investment income on the date of the transaction, is
credited or charged to undistributed net investment

B-27
<PAGE> 80

income. As a result, undistributed net investment income per share is
unaffected by sales or reacquisitions of the shares.

RECLASSIFICATION OF CAPITAL ACCOUNTS: The Fund accounts and reports for
distributions to shareholders in accordance with Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies. For
the Intermediate Term Series, the effect of applying this statement was to
increase undistributed net investment income by $3,909,174, increase accumulated
net realized losses by $56,772 for market discount recognized on securities sold
and decrease paid-in capital in excess of par by $3,852,402 for tax return of
capital distributions. Current year net investment income, net realized losses
and net assets were not affected by this change.

DEFERRED ORGANIZATION EXPENSES: Approximately $49,000 of expenses were incurred
in connection with the organization and initial registration of the U.S.
Treasury Series and such amount has been deferred and is being amortized over a
period of 60 months ending December, 1995.

DIVIDENDS AND DISTRIBUTIONS: The Money Market Series and U.S. Treasury Money
Market Series declare daily dividends from net investment income and net
short-term capital gains and losses. Dividends are paid monthly.

The Intermediate Term Series declares dividends from net investment
income daily; payment of dividends is made monthly. Distributions of net capital
gains, if any, are made annually.

Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.

NOTE 2. AGREEMENTS

The Fund has a management agreement with Prudential Mutual Fund
Management, Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility
for all investment advisory services and supervises the subadviser's performance
of such services. PMF has entered into a subadvisory agreement with The
Prudential Investment Corporation (``PIC''); PIC furnishes investment advisory
services in connection with the management of the Fund. PMF pays for the cost of
the subadviser's services, the compensation of officers of the Fund, occupancy
and certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.

The management fee paid to PMF is computed daily and payable monthly, at
an annual rate of .40 of 1% of the average daily net assets of the Intermediate
Term Series and the U.S. Treasury Money Market Series. With respect to the Money
Market Series, the management fee is payable as follows: .40 of 1% of average
daily net assets up to $1 billion, .375 of 1% of average daily net assets
between $1 billion and $1.5 billion and .35 of 1% in excess of $1.5 billion.

To reimburse Prudential Mutual Fund Distributors, Inc. (``PMFD'') as
distributor of the shares of the Money Market Series and the U.S. Treasury Money
Market Series, each series has entered into a distribution agreement pursuant to
which each series pays PMFD a reimbursement, accrued daily and payable monthly,
at an annual rate of .125% of each of the series' average daily net assets. PMFD
pays various broker-dealers, including Prudential Securities Incorporated
(``PSI'') and Pruco Securities Corporation (``Pruco''), affiliated
broker-dealers, for account servicing fees and for the expenses incurred by such
broker-dealers.

To reimburse PSI for its expenses as distributor of the Intermediate Term
Series, the Intermediate Term Series has entered into a distribution agreement
and a plan of distribution pursuant to which it pays PSI a fee, accrued daily
and payable monthly, at an annual rate of .25 of 1% of the lesser of (a) the
aggregate sales of shares issued (not including reinvestment of dividends and
distributions) on or after July 1, 1985 (the effective date of the plan) less
the aggregate net asset value of any such shares redeemed, or (b) the average
net asset value of the shares issued after the effective date of the plan.
Distribution expenses include commission credits to PSI branch offices for
payments of commissions and account servicing fees to financial advisers and an
allocation on account of overhead and other distribution-related expenses, the
cost of printing and mailing prospectuses to potential investors and of
advertising incurred in connection with the distribution of series shares. In
addition, PSI pays other broker-dealers, including Pruco, an affiliated
broker-dealer, for account servicing fees and other expenses incurred by such
broker-dealers in distributing these shares.

PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.

NOTE 3. OTHER
TRANSACTIONS
WITH AFFILIATES

Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the year ended November 30,
1994, the Fund incurred fees of approximately $1,066,000, $267,000, and
$79,000, respectively, for the Money Market Series, Intermediate Term Series,
and U.S. Treasury Money Market Series. As of November 30, 1994, approximately
$79,000, $20,000, and $6,000 of such fees were due to PMFS from the Money
Market Series, Intermediate

B-28
<PAGE> 81

Term Series and U.S. Treasury Money Market Series, respectively. Transfer agent
fees and expenses in the Statement of Operations includes certain out-of-pocket
expenses paid to non-affiliates.

NOTE 4. PORTFOLIO
SECURITIES

Purchases and sales of portfolio securities other than short-term investments,
for the Intermediate Term Series, for the year ended November 30, 1994 were
$1,226,973,317 and $1,333,353,540, respectively.

For the Intermediate Term Series the cost basis of investments for federal
income tax purposes was $211,627,944 and, accordingly, as of November 30, 1994,
net and gross unrealized depreciation of investments for federal income tax
purposes was $4,052,252.

For federal income tax purposes, the Intermediate Term Series has a
capital loss carryforward as of November 30, 1994 of approximately $79,007,000
of which $25,173,000 expires in 1995, $11,426,000 expires in 1996, $19,180,000
expires in 1997, $6,864,000 expires in 1998, $4,746,000 expires in 1999,
$235,000 expires in 2001, and $11,383,000 expires in 2002. Accordingly, no
capital gains distribution is expected to be paid to shareholders until net
gains have been realized in excess of such carryforward.

The Intermediate Term Series will elect to treat net capital losses of
approximately $3,428,300 incurred in the one month period ended November 30,
1994 as having incurred in the following fiscal year.

NOTE 5. JOINT
REPURCHASE
AGREEMENT ACCOUNT

The Fund, along with other affiliated registered investment companies,
transfers uninvested cash balances into a single joint account, the daily
aggregate balance of which is invested in one or more repurchase agreements
collateralized by U.S. Treasury or federal agency obligations. As of November
30, 1994, the Money Market Series and the Intermediate Term Series had 1.3% and
0.2%, respectively, undivided interests in the repurchase agreements in the
joint account. These undivided interests represented $9,908,000 and $1,439,000,
respectively, in principal amount. As of such date, the repurchase agreements in
the joint account and the value of the collateral therefor were as follows:

Goldman, Sachs & Co., 5.70%, in the principal amount of $250,000,000,
repurchase price $250,039,583, due 12/1/94. The value of the collateral
including accrued interest is $255,000,187.

Morgan (J.P.) Securities Inc., 5.68%, in the principal amount of
$200,000,000, repurchase price $200,031,556, due 12/1/94. The value of the
collateral including accrued interest is $204,329,069.

Morgan Stanley & Co. Inc., 5.68%, in the principal amount of $200,000,000,
repurchase price $200,031,556, due 12/1/94. The value of the collateral
including accrued interest is $204,148,271.

Smith Barney, Inc., 5.72%, in the principal amount of $100,000,000,
repurchase price $100,015,889, due 12/1/94. The value of the collateral
including accrued interest is $102,000,653.

NOTE 6. CAPITAL

Each series has authorized an unlimited number of shares of beneficial interest
at $.01 par value. Transactions in shares of beneficial interest for the
Intermediate Term Series for the fiscal years ended November 30, 1994 and 1993
were as follows:

<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------
1994 1993
---- ----

<S> <C> <C>
Shares sold................... 8,712,001 18,902,083
Shares issued in reinvestment
of dividends and
distributions............... 1,465,698 1,439,530
Shares reacquired............. (18,375,629) (16,203,923)
----------- -----------
Net increase (decrease)....... (8,197,930) 4,137,690
=========== ===========

</TABLE>

B-29
<PAGE> 82

PRUDENTIAL GOVERNMENT SECURITIES TRUST
MONEY MARKET SERIES
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
----------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- ---------- ---------- ----------

<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................ $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Net investment income..................................... 0.033 0.026 0.035 0.058 0.076
Dividends from net investment income...................... (0.033) (0.026) (0.035) (0.058) (0.076)
-------- -------- ---------- ---------- ----------
Net asset value, end of year.............................. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ========== ========== ==========
TOTAL RETURN#:............................................ 3.29% 2.62% 3.57% 5.96% 7.83%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............................. $637,343 $919,503 $1,026,187 $1,212,836 $1,355,058
Average net assets (000).................................. $732,867 $950,988 $1,113,759 $1,255,014 $ 857,385
Ratios to average net assets:
Expenses, including distribution fees................... 0.77% 0.72% 0.72% 0.65% 0.66%
Expenses, excluding distribution fees................... 0.64% 0.59% 0.60% 0.53% 0.53%
Net investment income................................... 3.19% 2.56% 3.42% 5.78% 7.52%

</TABLE>

- ---------------
# Total return is calculated assuming a purchase of shares on the first day and
a sale on the last day of each year reported and includes reinvestment of
dividends and distributions.

See Notes to Financial Statements.

B-30
<PAGE> 83

PRUDENTIAL GOVERNMENT SECURITIES TRUST
INTERMEDIATE TERM SERIES
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
----------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------

<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............................ $ 10.06 $ 9.97 $ 10.00 $ 9.71 $ 9.96
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------
Net investment income......................................... 0.64 0.69 0.75 0.82 0.84
Net realized and unrealized gain (loss) on investment
transactions................................................ (0.89) 0.11 (0.03) 0.31 (0.21)
-------- -------- -------- -------- --------
Total from investment operations............................ (0.25) 0.80 0.72 1.13 0.63
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
- ------------------
Dividends from net investment income.......................... (0.52) (0.69) (0.75) (0.84) (0.88)
Tax return of capital distribution............................ (0.12) (0.02) -- -- --
-------- -------- -------- -------- --------
Total distributions........................................... (0.64) (0.71) (0.75) (0.84) (0.88)
-------- -------- -------- -------- --------
Net asset value, end of year.................................. $ 9.17 $ 10.06 $ 9.97 $ 10.00 $ 9.71
======== ======== ======== ======== ========
TOTAL RETURN#................................................. (2.58)% 8.26% 7.40% 12.19% 6.73%

RATIOS/SUPPLEMENTAL DATA:

Net assets, end of year (000)................................. $241,980 $347,944 $303,451 $298,086 $328,458
Average net assets (000)...................................... $307,382 $321,538 $294,388 $301,643 $354,064
Ratios to average net assets:
Expenses, including distribution fees....................... 0.84% 0.80% 0.79% 0.79% 0.88%
Expenses, excluding distribution fees....................... 0.63% 0.59% 0.58% 0.63% 0.63%
Net investment income....................................... 5.48% 6.80% 7.47% 8.36% 8.60%
Portfolio turnover rate....................................... 431% 44% 60% 151% 68%

</TABLE>

See Notes to Financial Statements.

B-31
<PAGE> 84

PRUDENTIAL GOVERNMENT SECURITIES TRUST
U.S. TREASURY MONEY MARKET SERIES
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
DECEMBER 3,
1990*
YEAR ENDED NOVEMBER 30, THROUGH
-------------------------------------- NOVEMBER 30,
1994 1993 1992 1991
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................ $ 1.000 $ 1.000 $ 1.000 $ 1.000
Net investment income........................................... 0.033 0.025 0.034 0.057++
Dividends from net investment income............................ (0.033) (0.025) (0.034) (0.057)
-------- -------- -------- --------
Net asset value, end of period.................................. $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ========
TOTAL RETURN#................................................... 3.31% 2.54% 3.46% 5.84%

RATIOS/SUPPLEMENTAL DATA:

Net assets, end of period (000)................................. $293,984 $284,978 $233,600 $288,922
Average net assets (000)........................................ $308,454 $273,313 $263,459 $273,203
Ratios to average net assets:
Expenses, including distribution fees......................... 0.62% 0.66% 0.66% 0.50%+/++
Expenses, excluding distribution fees......................... 0.50% 0.53% 0.54% 0.38%+/++
Net investment income......................................... 3.21% 2.49% 3.29% 5.74%+/++

</TABLE>

- ---------------
* Commencement of investment operations.
+ Annualized.
++ Net of expense subsidy.
# Total return is calculated assuming a purchase of shares on the first
day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total return for a period
of less than one year is not annualized.

See Notes to Financial Statements.

B-32
<PAGE> 85

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Trustees of
Prudential Government Securities Trust:

In our opinion, the accompanying statements of assets and liabilities,
including the schedules of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Money Market Series, Intermediate
Term Series and U.S. Treasury Money Market Series (constituting Prudential
Government Securities Trust, hereafter referred to as the ``Fund'') at November
30, 1994, the results of each of their operations for the year then ended, the
changes in each of their net assets for each of the two years in the period then
ended and the financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as ``financial
statements'') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
November 30, 1994 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
January 16, 1995

IMPORTANT NOTICE FOR
CERTAIN SHAREHOLDERS
(UNAUDITED)

We are required by New York, California, Massachusetts and Oregon to inform
you that dividends which have been derived from interest on federal obligations
are not taxable to shareholders providing the mutual fund meets certain
requirements mandated by the respective state's taxing authorities. We are
pleased to report that 40% of the dividends paid by the Money Market Series*,
75.2% of the dividends paid by the Intermediate Term Series and 100% of the
dividends paid by the U.S. Treasury Money Market Series qualify for such
deduction.

Shortly after the close of the calendar year ended December 31, 1994, you
will be advised as to the federal tax status of the dividends you received in
calendar 1994.

For more detailed information regarding your state and local taxes, you
should contact your tax adviser or the state/local taxing authorities.

* Due to certain minimum portfolio holding requirements in California and New
York, residents of those states will not be able to exclude interest on Federal
obligations from state and local tax.

B-33

<PAGE> 86
LETTER TO
SHAREHOLDERS

April 3, 1995

Dear Shareholder:

In the past year, adjustable rate securities have felt the impact of a
series of seven interest rate increases. Yields have risen and some bond prices
have fallen drastically, but adjustable rate securities with short-term
maturities were resistant -- their prices aren't as sensitive to rising interest
rates since their coupons adjust periodically. We're pleased to report that the
Prudential Adjustable Rate Securities Fund has produced positive, above-average
total returns this year, as measured by Lipper Analytical Services, Inc.

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FUND PERFORMANCE
- --------------------------------------------------------------------------------
CUMULATIVE RETURNS AVERAGE ANNUAL RETURNS(1)
30-DAY AS OF 2/28/95 AS OF 3/31/95
SEC YIELD 1 YEAR SINCE INCEP. 1 YEAR SINCE INCEP.*
<S> <C> <C> <C> <C> <C>
Class A 4.7% 3.1% 7.4% 2.6% 2.4%
Class B 4.8% 3.0% 7.3% 2.6% 2.7%
Lipper Adj.
Rate* N/A -1.6% 3.7% N/A N/A
</TABLE>

Past performance is not indicative of future results. Principal and
investment return will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost.

(1) Source: Prudential Mutual Fund Management Inc. and Lipper Analytical
Services Inc. The cumulative total returns do not take into account applicable
sales charges. The average annual returns do take into account applicable sales
charges. The Fund charges a maximum front-end sales load of 1% for Class A
shares and a contingent deferred sales charge of 1% (for redemptions in the
first year only) for Class B shares.

*Inception date: 6/10/92.

Note: Without expense subsidies and management fee waivers, the Fund's
1-year average annual total returns would have been 2.6% for Class A shares and
2.2% for Class B shares. The returns since inception would have been 2.3% and
1.6%, respectively. Subsidies and management fee waivers may be reduced or
terminated in the future.

-1-

<PAGE> 87

THE OBJECTIVE.

The Prudential Adjustable Rate Securities Fund seeks high current income
consistent with low volatility of principal. Of course, there is no assurance
the Fund will meet that objective. At least 65% of the portfolio is in
adjustable rate securities, mainly adjustable rate mortgages (ARMs), with the
rest in fixed-rate bonds. Under normal market conditions, 75% of the Fund's
assets are in bonds rated double-A or better by the credit rating services.
Currently, the Fund maintains a short-term effective maturity, similar to that
of the one-year Treasury note.

STRONGER GROWTH SPURRED RISING INTEREST RATES.

When the economy shifts into high gear as it has in the past year, bond
investors start to worry that inflation will follow and erode the value of their
returns. The Federal Reserve, which governs U.S. monetary policy, decided that
annualized growth of 6% in the fourth quarter of 1993 was too high for comfort;
they began last February to engineer a "soft landing" that would cool off growth
and dampen inflationary expectations without sending the economy into a
recession. Their primary tool? The federal funds target rate (the overnight
interbank lending rate), which was raised seven times to 6% at this writing from
3% at it's lowest in 1994.

The result? The Lehman Brothers Short-term Treasury Index rose a posted
0.5% in total return the past 12 months. Of course, long-term rates also rose
and investors in long-term government bonds really suffered, with losses of
7.7%, as reported by Lehman. The silver lining is that yields have risen and
the Fund's SEC-standardized 30-day yield on February 28, 1995 was 4.7% and 4.8%,
up from 3.5% and 3.6% for Class A and B, respectively, a year ago.

The Fund stood up well in this bearish bond market, producing a positive
total return of 2.6% for both Class A and Class B for the 12 months ended
3/31/95, the worst bond market in 75 years. This compares to the average fund
adjustable rate mortgage fund, which posted negative earnings for the year
according to Lipper Analytical Services Inc. The Fund is 3.5% above the average
ARM fund and 3% above the average U.S. government fund. We hope to continue this
trend.

A COUPLE GOOD DECISIONS HELPED PERFORMANCE.

As short-term interest rates rose, we restructured the portfolio in an
attempt to limit price volatility. Our strategy was the same throughout most of
the year: we raised cash, shifted to liquid bonds in the marketplace and
concentrated on ARMs with high coupons. These ARMs saw less of a price decline
since their high coupons became more desirable in a rising interest rate
environment.

-2-

<PAGE> 88

- - CASH. We kept about one-fifth of the Fund in short-term securities (17.9% at
2/28/95) compared to 10% as of 2/28/94. These short-term securities reduce the
Fund's average maturity and, of course, it's value does not react to interest
rates. Since short-term securities generate less income than long-term
securities, our 30-day SEC yield has not risen as much as market rates (120
basis points for the Fund, compared to 275 basis points for the federal funds
rate).

- - LIQUIDITY. When the markets are turbulent -- as they were for most of the
reporting period -- high-quality GNMA and FNMA securities are our favorite
bonds. We limited our holdings in privately-issued mortgages because their
yields were not sufficient to compensate us for additional risk.

The Constant Maturity Treasury Index. The portfolio is predominately in
adjustable rate mortgages, whose coupon adjustment is based on the Constant
Maturity Treasury (CMT) Index, because these securities have been priced to
produce the attractive yields in the adjustable rate mortgage market.

HIGHER RATES SHOULD SLOW GROWTH AND QUELL INFLATION FEARS.

Looking into the rest of 1995, we expect limited Federal Reserve action
and more investor-friendly markets. The rise in interest rates that created
havoc last year should result in moderate economic growth and keep inflationary
expectations in check. We think investors should look for moderate returns, in
line with historical averages -- in other words, expect to earn coupon income,
and possibly modest price gains.

We appreciate having you as a Prudential Adjustable Rate Securities Fund
shareholder and remain committed to managing the portfolio for your benefit.

SINCERELY,

/s/ LAWRENCE C. MCQUADE
- -------------------------
Lawrence C. McQuade
President

/s/ DAVID GRAHAM
- -------------------------
David Graham
Portfolio Manager
-3-

<PAGE> 89

PORTFOLIO Q&A

[FIGURE 1]
Dennis Bushe

Many investors avoided bond funds in the past year, fearing that rising
interest rates would erode their returns and add volatility to their investment
portfolio. If you are contemplating putting cash into the bond market -- in
taxable or tax-exempt securities -- you might want to consider some of the
following points. We talked with Prudential Mutual Funds chief fixed income
strategist Dennis Bushe about why bonds and bond mutual funds may make sense in
today's investment environment.

Q. WHY ARE BONDS AN ATTRACTIVE BUY RIGHT NOW?

A. First, bond prices corrected in 1994, which put interest rates at very
attractive levels in 1995. Second, real rates of return (the interest rate
minus the inflation rate) are still very high historically. According to
Ibbotson Associates, a nationally recognized investment analysis firm, the
annual inflation-adjusted return on bonds from 1926 to 1994 was between
2.5% and 3.0%. Today's investors receive over 4.5% in total
inflation-adjusted, annualized total return. Of course, these numbers are
just for illustration, but they show how much higher interest rates improve
bond total returns when inflation is only 2.7%, as measured by the Consumer
Price Index. And beating inflation is one primary goal of long-term
investing.

Q. WHY BUY A BOND FUND INSTEAD OF AN INDIVIDUAL BOND?

A. One of the biggest risks to bond investing is credit quality. Of course
you can avoid virtually all credit risk in a government bond fund, but some
investors need higher income than Uncle Sam provides. Bond funds help
manage this risk, and that may be especially important in 1995. First of
all, if the U.S. economy is beginning to slow down, as many economists
believe, then credit quality is a concern. A credit team becomes very
valuable, carefully selecting bonds in different sectors and industries for
bond portfolios. In addition, few individual investors have the resources
or clout to continually monitor companies, unearth possible credit problems
before they surface, and negotiate favorable terms with troubled issuers --
a bond fund does. Finally, the diversification of a bond fund may help
investors avoid wide price swings if one holding does experience financial
difficulties.

-4-
<PAGE> 90
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC. PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
- -------------------------------------------------------
<C> <S> <C>
LONG-TERM INVESTMENTS--71.6%
ADJUSTABLE RATE MORTGAGE
PASS-THROUGHS--71.6%
Federal Home Loan Mortgage
Corporation,
$ 9,794# 5.01%, 7/01/24.............. $ 9,779,057
8,065 5.03%, 8/01/24.............. 8,097,562
5,458 5.13%, 5/01/24.............. 5,413,207
97 7.14%, 10/01/23............. 99,617
29 7.38%, 7/01/22.............. 29,968
Federal National Mortgage
Association,
7,931 5.90%, 11/01/24............. 8,121,892
3,000 6.75%, 1/01/23.............. 3,057,188
Resolution Trust Corporation,
7,876 7.09%, 12/25/20............. 7,949,376
-----------
Total Adjustable Rate Mortgage
Pass-Throughs
(cost $42,225,353).......... 42,547,867
-----------
Total long-term investments
(cost $42,225,353).......... 42,547,867
-----------
SHORT-TERM INVESTMENTS--17.9%
ADJUSTABLE RATE MORTGAGE
PASS-THROUGHS--8.4%
Federal National Mortgage
Association,
$ 5,000 5.89%, 3/07/95
(cost $4,999,454)........... $ 5,000,000
-----------
CORPORATE BONDS--5.0%
Salomon Incorporated,
3,000 7.10%, 2/14/96
(cost $3,000,000)........... 2,991,750
-----------
REPURCHASE AGREEMENT--4.5%
Joint Repurchase Agreement
2,677 Account, 6.07%, 3/01/95
(cost $2,677,000; Note 5)... 2,677,000
-----------
Total short-term investments
(cost $10,676,454).......... 10,668,750
-----------
TOTAL INVESTMENTS--89.5%
(cost $52,901,807; Note 4).. 53,216,617
U.S. GOVERNMENT OBLIGATION
SOLD SHORT--(11.9)%
U.S. Treasury Note,
7,000 7.25%, 2/15/98
(proceeds $6,977,305)....... (7,066,710)
-----------
Total investments, net of
short sales--77.6%.......... 46,149,907
Other assets in excess of
liabilities--22.4%.......... 13,306,502
-----------
NET ASSETS--100%.............. $59,456,409
===========
</TABLE>

- ---------------
# Pledged as collateral on short sale.

See Notes to Financial Statements.

-5-

<PAGE> 91
- -------------------------------------------------------------------------------
PRUDENTIAL ADJUSTABLE RATE
SECURITIES FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS FEBRUARY 28, 1995
-----------------
<S> <C>
Investments, at value (cost
$52,901,807)................................................... $53,216,617
Cash........................................................... 4,907
Receivable for investments sold................................ 9,826,794
Receivable for investment sold short........................... 6,977,305
Interest receivable............................................ 548,912
Receivable for Fund shares sold................................ 2,020
Deferred expenses and other assets............................. 84,381
-----------
Total assets................................................. 70,660,936
-----------
LIABILITIES
Investment sold short, at value (proceeds $6,977,305).......... 7,066,710
Payable for investments purchased.............................. 3,080,898
Payable for Fund shares reacquired............................. 849,122
Accrued expenses............................................... 137,328
Dividends payable.............................................. 47,224
Due to Manager................................................. 23,245
-----------
Total liabilities............................................ 11,204,527
-----------
NET ASSETS..................................................... $59,456,409
===========
Net assets were comprised of:
Common stock, at par......................................... $ 6,222
Paid-in capital in excess of par............................. 68,231,556
-----------
68,237,778
Accumulated net realized loss on investments................. (9,006,774)
Net unrealized appreciation on investments................... 225,405
-----------
Net assets, February 28, 1995.............................. $59,456,409
===========

Class A:
Net asset value and redemption price per share
($58,709,948 / 6,144,443 shares of common stock issued and
outstanding)............................................... $9.55
Maximum sales charge (1.0% of offering price)................ .10
-----------

Maximum offering price to public............................. $9.65
-----------
Class B:
Net asset value, offering price and redemption price per
share ($746,461 / 77,858 shares of common stock issued
and outstanding)........................................... $9.59
===========
</TABLE>

See Notes to Financial Statements.

-6-
<PAGE> 92
- -----------------------------------------------------
PRUDENTIAL ADJUSTABLE RATE
SECURITIES FUND, INC.
STATEMENT OF OPERATIONS
- -----------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
FEBRUARY 28,
NET INVESTMENT INCOME 1995
------------
<S> <C>
Income
Interest.............................. $ 4,299,982
------------
Expenses
Management fee........................ 456,738
Distribution fee--Class A, net of
waiver of $445,344.................. --
Distribution fee--Class B, net of
waiver of $22,789................... --
Custodian's fees and expenses......... 168,000
Registration fees..................... 84,000
Reports to shareholders............... 73,000
Directors' fees....................... 48,000
Transfer agent's fees and expenses.... 47,000
Amortization of deferred organization
expenses............................ 37,000
Audit fee............................. 34,000
Legal fees............................ 13,000
Insurance expense..................... 4,000
Miscellaneous......................... 9,640
------------
Total expenses...................... 974,378
------------
Net investment income................... 3,325,604
------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment transactions............... (2,250,608)
Short sales........................... 264,564
------------
(1,986,044)
------------
Net change in unrealized
appreciation/depreciation on:
Investments........................... 641,031
Short sales........................... (89,405)
------------
551,626
------------
Net loss on investments................. (1,434,418)
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS............... $ 1,891,186
============

See Notes to Financial Statements.

</TABLE>

- --------------------------------------------------------
PRUDENTIAL ADJUSTABLE RATE
SECURITIES FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
INCREASE (DECREASE) IN ----------------------------
NET ASSETS 1995 1994
------------ -------------
<S> <C> <C>
Operations
Net investment income.... $ 3,325,604 $ 8,392,463
Net realized loss on
investment
transactions........... (1,986,044) (7,020,730)
Net change in unrealized
appreciation/depreciation
on investments......... 551,626 1,125,105
------------ -------------
Net increase in net
assets resulting from
operations............. 1,891,186 2,496,838
------------ -------------
Contingent deferred sales
charges rebated.......... -- 87,220
------------ -------------
Dividends and distributions
(Note 1)
Dividends to shareholders
from net investment
income
Class A................ (3,246,500) (7,557,640)
Class B................ (79,104) (834,823)
------------ -------------
(3,325,604) (8,392,463)
------------ -------------
Distributions to
shareholders in excess
of net investment
income
Class A................ (100,808) (262,362)
Class B................ (6,354) (28,982)
------------ -------------
(107,162) (291,344)
------------ -------------
Fund share transactions
(net of share
conversions) (Note 6)
Net proceeds from shares
sold................... 2,804,234 75,303,969
Net asset value of shares
issued to shareholders
in reinvestment of
dividends and
distributions.......... 2,778,067 6,959,698
Cost of shares
reacquired............... (72,756,688) (206,110,076)
------------ -------------
Decrease in net assets
from Fund share
transactions........... (67,174,387) (123,846,409)
------------ -------------
Total decrease............. (68,715,967) (129,946,158)
NET ASSETS
Beginning of year.......... 128,172,376 258,118,534
------------ -------------
End of year................ $ 59,456,409 $ 128,172,376
============ =============
</TABLE>

See Notes to Financial Statements.

-7-
<PAGE> 93
- --------------------------------------------------------------------------------
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

The Prudential Adjustable Rate Securities Fund, Inc. (the ``Fund'') is
registered under the Investment Company Act of 1940 as a diversified, open-end
management investment company. The Fund was incorporated in Maryland on December
23, 1991 and had no operations until the issuance of 5,000 shares of Class A
common stock and 5,000 shares of Class B common stock for $100,000 on May 1,
1992 to Prudential Mutual Fund Management, Inc. (``PMF''). Investment operations
commenced on June 10, 1992. The Fund's investment objective is high current
income consistent with low volatility of principal by investing primarily in
adjustable rate securities, including mortgage-backed securities issued or
guaranteed by private institutions or the U.S. Government, its agencies or
instrumentalities, asset-backed securities and corporate and other debt
obligations, which have interest rates which reset at periodic intervals.

NOTE 1. ACCOUNTING POLICIES

The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.

SECURITIES VALUATION: The Fund values portfolio securities on the basis of
current market quotations provided by dealers or by a pricing service approved
by the Board of Directors, which uses information such as quotations from
dealers, market transactions in comparable securities, various relationships
between securities and calculations on yield to maturity in determining values.
If market quotations are not readily available, a security is valued at fair
value as determined under procedures established by the Board of Directors.

Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost.

In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian, or designated subcustodians, as the case may be under
triparty repurchase agreements, takes possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. If the seller defaults and the value of
the collateral declines or if bankruptcy proceedings are commenced with respect
to the seller of the security, realization of the collateral by the Fund may be
delayed or limited.

SHORT SALES: The Fund may sell a security it does not own in anticipation of a
decline in the market value of that security (short sale). When the Fund makes a
short sale, it must borrow the security sold short and deliver it to the
broker-dealer through which it made the short sale. The Fund may have to pay a
fee to borrow the particular security and may be obligated to pay over any
payments received on such borrowed securities. The Fund is then obligated to
replace the security borrowed by purchasing it at the market price at the time
of replacement. The price at such time may be more or less than the price at
which the security was sold by the Fund. A gain, limited to the price at which
the Fund sold the security short, or a loss, unlimited in magnitude, will be
recognized upon the termination of a short sale if the market price at
termination is less than or greater than, respectively, the proceeds originally
received.

SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Fund amortizes premiums and discounts paid on purchases of
portfolio securities as adjustments to interest income.

Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.

FEDERAL INCOME TAXES: It is the Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income to its shareholders. Therefore, no
federal income tax provision is required.

DIVIDENDS AND DISTRIBUTIONS: The Fund declares daily and pays dividends monthly
from net investment income. Net capital gains, if any, will be distributed at
least annually. Dividends and distributions are recorded on the ex-dividend
date. Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to dividends in
excess of net investment income.

RECLASSIFICATION OF CAPITAL ACCOUNTS: The Fund accounts and reports for
distributions to shareholders in accordance with A.I.C.P.A. Statement of
Position 93-2: Determination, Disclosure, and Financial Statement Presentation
of Income; Capital Gain, and Return of Capital Distributions by Investment
Companies. For the year ended February 28, 1995, the Fund reclassed $208,058 of
dividends

-8-

<PAGE> 94
in excess of net investment income to paid-in capital from accumulated
distributions in excess of net investment income. Net investment income, net
realized gains and net assets were not affected by this change.

DEFERRED ORGANIZATION EXPENSES: Approximately $162,000 of expenses were incurred
in connection with the organization of the Fund. These costs have been deferred
and are being amortized ratably over a period of sixty months from the date the
Fund commenced investment operations.

NOTE 2. AGREEMENTS

The Fund has a management agreement with PMF. Pursuant to this agreement,
PMF has responsibility for all investment advisory services and supervises the
subadviser's performance of such services. PMF has entered into a subadvisory
agreement with The Prudential Investment Corporation (``PIC''). PIC furnishes
investment advisory services in connection with the management of the Fund. PMF
pays for the services of PIC, the cost of compensation of officers of the Fund,
occupancy and certain clerical and bookkeeping costs of the Fund. The Fund bears
all other costs and expenses.

The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Fund.

The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated (``PSI'') which
acts as distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse the Distributors for their expenses incurred in
distributing and servicing the Fund's Class A and B shares, the Fund, pursuant
to plans of distribution, pays the Distributors a reimbursement, accrued daily
and payable monthly.

Pursuant to the Class A Plan, the Fund may reimburse PMFD for its expenses
with respect to Class A shares, at an annual rate of up to .50 of 1% of the
average daily net asset value of the Class A shares. PMFD pays various
broker-dealers, including PSI and Pruco Securities Corporation (``Prusec''),
affiliated broker-dealers, for account servicing fees and other expenses
incurred by such broker-dealers. PMFD has waived, temporarily and voluntarily,
all payments to it under the Class A Plan. The amount of fees waived for the
year ended February 28, 1995, amounted to $445,344 ($.05 per Class A share; .50%
of Class A average net assets).

Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to 1% of the average daily net assets of the Class B shares. PSI has
waived, temporarily and voluntarily, all payments to it under the Class B Plan.
The amount of fees waived for the year ended February 28, 1995 amounted to
$22,789 ($.10 per Class B share; 1.00% of Class B average net assets).

The Class B distribution expenses include commission credits for payments
of commissions and account servicing fees to financial advisers and an
allocation for overhead and other distribution-related expenses, interest and/or
carrying charges, the cost of printing and mailing prospectuses to potential
investors and of advertising incurred in connection with the distribution of
shares.

PMFD has advised the Fund that it has received approximately $1,900 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended February 28, 1995. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons.

With respect to the Class B Plan, at any given time, the amount of expenses
incurred by PSI in distributing the Fund's shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total payment made by the Fund pursuant to
the Class B Plan. PSI advised the Fund that for the year ended February 28,
1995, it received approximately $5,000 in contingent deferred sales charges
imposed upon certain redemptions by investors. PSI, as distributor, has also
advised the Fund that at February 28, 1995, the amount of distribution expenses
incurred by PSI and not yet reimbursed by the Fund or recovered through
contingent deferred sales charges approximated $9,100. This amount may be
recovered through future payments under the Class B Plan or contingent deferred
sales charges.

PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.

NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES

Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the fiscal year ended February
28, 1995, the Fund incurred fees of approximately $38,000 for the services of
PMFS. As of February 28, 1995, approximately $2,400 of such fees were due to
PMFS. Transfer agent fees and expenses in the Statement of Operations include
certain out-of-pocket expenses paid to non-affiliates.

NOTE 4. PORTFOLIO SECURITIES

Purchases and sales of investment securities, other than short-term
investments, for

-9-

<PAGE> 95
the fiscal year ended February 28, 1995 were $224,246,307 and $286,453,845,
respectively.

The federal income tax basis of the Fund's investments at February 28, 1995
was substantially the same as the basis for financial reporting and,
accordingly, net unrealized depreciation for federal income tax purposes was
$314,810 (gross unrealized appreciation--$385,697; gross unrealized
depreciation--$70,887).

For federal income tax purposes, the Fund has a capital loss carryforward
as of February 28, 1995 of approximately $8,597,700 of which $3,282,600 expires
in 2002 and $5,315,100 expires in 2003. Accordingly, no capital gains
distribution is expected to be paid to shareholders until net gains have been
realized in excess of such carryforward.

The Fund will elect to treat net capital losses of approximately $409,000
incurred in the four month period ended February 28, 1995 as having been
incurred in the following fiscal year.

NOTE 5. JOINT REPURCHASE AGREEMENT ACCOUNT

The Fund along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or Federal agency obligations. As of February 28, 1995, the
Fund has a 0.33% undivided interest in the repurchase agreements in the joint
account. The undivided interest for the Fund represents $2,677,000 in the
principal amount. As of such date, each repurchase agreement in the joint
account and the collateral therefor were as follows:

Goldman, Sachs & Co., 6.08%, in the principal amount of $250,000,000,
repurchase price $250,042,222, due 3/1/95. The value of the collateral including
accrued interest is $255,043,078.

Bear, Stearns & Co., 6.07%, in the principal amount of $250,000,000,
repurchase price $250,042,153, due 3/1/95. The value of the collateral including
accrued interest is $255,223,281.

Barclays de Zoete Wedd Securities, Inc., 6.08%, in the principal amount of
$60,000,000, repurchase price $60,010,133, due 3/1/95. The value of the
collateral including accrued interest is $61,200,060.

Smith Barney Inc., 6.06%, in the principal amount of $250,000,000,
repurchase price $250,042,083 due 3/1/95. The value of the collateral including
accrued interest is $255,000,305.

NOTE 6. CAPITAL

The Fund offers both Class A and Class B shares. Class A shares are sold with a
front-end sales charge of up to 1.0%. Class B shares are sold with a contingent
deferred sales charge of 1.0% if they are redeemed within one year of purchase.
Class B shares will be automatically converted into Class A shares after the
one-year contingent deferred sales charge period has expired. Both classes of
shares have equal rights as to earnings, assets and voting privileges except
that each class bears different distribution expenses and has exclusive voting
rights with respect to its distribution plan.

There are 2 billion authorized shares of $.001 par value common stock
divided into two classes, designated Class A and Class B common stock, each of
which consists of 1 billion authorized shares. Of the 6,222,301 shares issued
and outstanding at February 28, 1995, PMF owned 10,015 Class A shares.

-10-

<PAGE> 96
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A SHARES AMOUNT
- ------- ---------------- -------------
<S> <C> <C>
Year ended February 28, 1995:
Shares sold.................... 228,976 $ 2,205,352
Shares issued in reinvestment
of distributions............. 285,589 2,710,958
Shares reacquired.............. (7,570,166) (71,826,463)
---------------- -------------
Net decrease in shares
outstanding before
conversion................... (7,055,601) (66,910,153)
Shares issued upon conversion
from Class B................. 447,807 4,242,531
---------------- -------------
Net decrease in shares
outstanding.................. (6,607,794) $ (62,667,622)
================ =============

Year ended February 28, 1994:
Shares sold.................... 3,885,604 $ 38,096,534
Shares issued in reinvestment
of distributions............. 643,966 6,301,453
Shares reacquired.............. (17,047,153) (166,644,600)
---------------- -------------
Net decrease in shares
outstanding before
conversion................... (12,517,583) $(122,246,613)
Shares issued upon conversion
from Class B................. 3,195,365 31,329,562
---------------- -------------
Net decrease in shares
outstanding.................. (9,322,218) $ (90,917,051)
================ =============

<CAPTION>
Class B
- --------
<S> <C> <C>
Year ended February 28, 1995:
Shares sold.................... 62,621 $ 598,882
Shares issued in reinvestment
of distributions............. 7,031 67,109
Shares reacquired.............. (95,108) (930,225)
---------------- -------------
Net decrease in shares
outstanding before
conversion................... (25,456) (264,234)
Shares reacquired upon
conversion into Class A...... (446,322) (4,242,531)
---------------- -------------
Net decrease in shares
outstanding.................. (471,778) $ (4,506,765)
================ =============

Year ended February 28, 1994:
Shares sold.................... 597,901 $ 5,877,873
Shares issued in reinvestment
of distributions............. 66,872 658,245
Shares reacquired.............. (827,247) (8,135,914)
---------------- -------------
Net decrease in shares
outstanding before
conversion................... (162,474) (1,599,796)
Shares reacquired upon
conversion into Class A...... (3,188,039) (31,329,562)
---------------- -------------
Net decrease in shares
outstanding.................. (3,350,513) $ (32,929,358)
================ =============
</TABLE>

-11-

<PAGE> 97
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------ -------------------------------------------
JUNE 10, JUNE 10,
YEAR YEAR 1992* YEAR YEAR 1992*
ENDED ENDED THROUGH ENDED ENDED THROUGH
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1995 1994 1993 1995 1994 1993
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:

Net asset value, beginning of period.... $ 9.63 $ 9.94 $ 10.00 $ 9.67 $ 9.94 $ 10.00
------------ ------------ ------------ ------------ ------------ ------------

INCOME FROM INVESTMENT OPERATIONS

Net investment income+.................. .36 0.41 0.35 .360 .41 0.31

Net realized and unrealized loss on
investment transactions............... (.07) (0.29) (0.05) (.08) (0.29) (0.05)
------------ ------------ ------------ ------------ ------------ ------------
Total from investment operations...... .29 0.12 0.30 .28 0.12 0.26

LESS DISTRIBUTIONS

Dividends from net investment income.... (.35) (0.41) (0.35) (.33) (0.41) (0.31)

Distributions in excess of net
investment income..................... (.01) (0.02) (0.01) (.03) (0.01) (0.01)
------------ ------------ ------------ ------------ ------------ ------------

Total distributions................... (.36) (0.43) (0.36) (.36) (0.42) (0.32)
------------ ------------ ------------ ------------ ------------ ------------
Contingent deferred sales charges
rebated............................... -- -- -- -- .03 --
------------ ------------ ------------ ------------ ------------ ------------
Net asset value, end of period.......... $ 9.56 $ 9.63 $9.94 $ 9.59 $ 9.67 $ 9.94
============ ============ ============ ============ ============ ============
TOTAL RETURN#........................... 3.07% 1.24% 2.92% 2.96% 1.58% 2.56%

RATIOS/SUPPLEMENTAL DATA:

Net assets, end of period (000)......... $58,710 $122,860 $219,352 $746 $5,312 $38,766

Average net assets (000)................ $89,069 $176,863 $217,329 $2,279 $19,742 $33,895

Ratios to average net assets:+

Expenses, including distribution
fees.................................. 1.07% 0.69% 0.77%** 1.03% 0.75% 1.27%**

Expenses, excluding distribution
fees.................................. 1.07% 0.63% 0.27%** 1.03% 0.63% 0.27%**

Net investment income................. 3.65% 4.29% 4.81%** 3.47% 4.23% 4.31%**

Portfolio turnover rate................. 268% 130% 45% 268% 130% 45%

</TABLE>

- ---------------
* Commencement of investment operations.
** Annualized.
+ Net of management fee and/or distribution fee waivers.
# Total return does not consider the effect of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestments of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.

See Notes to Financial Statements.

-12-
<PAGE> 98
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------

The Shareholders and Board of Directors
Prudential Adjustable Rate Securities Fund, Inc.

We have audited the accompanying statement of assets and liabilities of
Prudential Adjustable Rate Securities Fund, Inc., including the portfolio of
investments, as of February 28, 1995, the related statements of operations for
the year then ended and of changes in net assets for each of the two years in
the period then ended and the financial highlights for each of the two years in
the period then ended and for the period June 10, 1992 (commencement of
operations) to February 28, 1993. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at February
28, 1995 by correspondence with the custodian and brokers; where replies were
not received from brokers, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential
Adjustable Rate Securities Fund, Inc. at February 28, 1995, the results of its
operations, the changes in its net assets and the financial highlights for the
respective stated periods, in conformity with generally accepted accounting
principles.

Deloitte & Touche LLP
New York, New York
April 13, 1995
-13-
<PAGE> 99

PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND

COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND AND
THE LEHMAN BROS 1-3 YEAR GOV'T. INDEX

[FIGURE 2]

[FIGURE 3]

Past performance is not predictive of future performance and an investor's
shares may be worth more or less than their original cost.

These graphs are furnished to you in accordance with SEC regulations. They
compare a $10.00 investment in Prudential Adjustable Rate Securities Fund (Class
A and Class B) with a similar investment in the Lehman Bros. 1-3 Year Government
Index (Lehman Government Index) by portraying the initial account values at the
commencement of operations of each class and subsequent account values at the
end of each fiscal year (February 28), as measured of a quarterly basis,
beginning in 1992. For purposes of the graphs and, unless otherwise indicated,
the accompanying tables, it has been assumed that (a) the maximum sales charge
was deducted from the initial $10.00 investment in Class A shares; (b) Class B
shares converted into Class A shares on July 1, 1993 and the graph demonstrates
the performance of Class A shares since that date; (c) all recurring fees
(including management fees) were deducted; and (d) all dividends and
distributions were reinvested.

The Lehman Government Index is a weighted index comprised of securities issued
or backed by the U.S. government and its agencies with a remaining maturity of
one to three years. The Lehman Government Index is an unmanaged index and
includes the reinvestment of all dividends, but does not reflect the payment of
transaction costs and advisory fees associated with an investment in the Fund.
The securities which comprise the Lehman Government Index may differ
substantially from he securities in the Fund's portfolio. The Lehman
Government Index is not the only index that may be used to characterize
performance of adjustable rate security funds and other indices may portray
different comparative performance.

<PAGE> 100

THE PRUDENTIAL MUTUAL FUND FAMILY
- -------------------------------------------------------------------------------

Prudential Mutual Fund Management offers a broad range of mutual funds designed
to meet your individual needs. We welcome you to review the investment options
available through our family of funds. For more information on the Prudential
Mutual Funds, including charges and expenses, contact your Prudential Securities
Financial Advisor or Pruco Securities Representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.

TAXABLE BOND FUNDS

Prudential Adjustable Rate Securities Fund, Inc.
Prudential Diversified Bond Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
(formerly known as Prudential Government Plus Fund)
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust

TAX-EXEMPT BOND FUNDS

Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.

GLOBAL FUNDS

Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.

EQUITY FUNDS

Prudential Allocation Fund
(formerly known as Prudential FlexiFund)
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible(R) Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
(formerly known as Prudential Growth Fund)
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund

MONEY MARKET FUNDS

- - Taxable Money Market Funds
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
- - Tax-Free Money Market Funds
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- - Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- - Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series

<PAGE> 101

DIRECTORS
Edward D. Beach
Delayne Dedrick Gold
Harry A. Jacobs, Jr.
Lawrence C. McQuade
Thomas T. Mooney
Thomas H. O'Brien
Thomas A. Owens, Jr.
Richard A. Redeker
Stanley E. Shirk

OFFICERS
Lawrence C. McQuade, President
Robert F. Gunia, Vice President
Susan C. Cote, Treasurer
S. Jane Rose, Secretary
Deborah A. Docs, Assistant Secretary

MANAGER
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, NY 10292

INVESTMENT ADVISER
Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101

DISTRIBUTORS
Prudential Mutual Fund Distributors, Inc.
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292

CUSTODIAN
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171

TRANSFER AGENT
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906

INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281

LEGAL COUNSEL
Shereff, Friedman, Hoffman & Goodman
919 Third Avenue
New York, NY 10022

PRUDENTIAL MUTUAL FUNDS
ONE SEAPORT PLAZA
NEW YORK, NY 10292
TOLL FREE (800) 225-1852, COLLECT (908) 417-7555

This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.

74429J106 MF156E
74429J205 [LOGO] Cat. #444591Z

PRUDENTIAL
ADJUSTABLE RATE
SECURITIES
FUND, INC.
----------

[FIGURE 4]

PRUDENTIAL MUTUAL FUNDS
BUILDING YOUR FUTURE [LOGO]
ON OUR STRENGTH(SM)

ANNUAL REPORT
FEBRUARY 28, 1995

<PAGE> 102

PROXY

PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned hereby appoints S. Jane Rose, Ellyn C. Acker and Grace
Torres as Proxies, each with the power of substitution, and hereby authorizes
each of them to represent and to vote, as designated below, all the shares of
common stock of the Prudential Adjustable Rate Securities Fund, Inc. held of
record by the undersigned on May 26, 1995 at the Special Meeting of Shareholders
to be held on August 15, 1995, or any adjournment thereof.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE FOLLOWING PROPOSAL.

1. Approval or disapproval of the Agreement and Plan of Reorganization
and Liquidation

/ / APPROVE / / DISAPPROVE / / ABSTAIN

2. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH
OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.

(over)

(Continued from other side)

PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY, USING THE ENCLOSED
ENVELOPE.

THIS PROXY WHEN EXECUTED WILL BE VOTED IN THE MANNER DESCRIBED HEREIN BY THE
UNDERSIGNED SHAREHOLDER. IF EXECUTED AND NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSAL 1.

Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign.

When signing as attorney,
executor, administrator, trustee
or guardian, please give full
title as such. If a corporation,
please sign in full corporate name
by president or other authorized
officer. If a partnership, please
sign in partnership name by
authorized person.

Dated _____________________ , 1995

----------------------------------
Signature

----------------------------------
Signature if held jointly
<PAGE> 103

<TABLE>
<C> <S>
MANY SHAREHOLDERS THINK THEIR VOTES ARE NOT IMPORTANT.
ON THE CONTRARY, THEY ARE VITAL.

PRUDENTIAL ADJUSTABLE The Special Meeting on August 15, 1995 will have to be
RATE SECURITIES adjourned without conducting any business if less than a
FUND, INC. majority of the eligible shares are represented.
NEEDS And the Fund, at shareholders' expense, will have to continue
YOUR PROXY VOTE to solicit votes until a quorum is obtained.
BEFORE Your vote, then, could be critical in allowing the Fund to hold
AUGUST 15, 1995 the meeting as scheduled.
SO PLEASE RETURN YOUR PROXY CARD AS SOON AS POSSIBLE.
All shareholders will benefit from your cooperation.
Thank you.
</TABLE>
<PAGE> 104

PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.

June 26, 1995

Dear Shareholder:

The attached proxy materials describe a proposal whereby all of the assets
of Prudential Adjustable Rate Securities Fund, Inc. (Adjustable Rate Fund) will
be acquired by Prudential Government Securities Trust -- Intermediate Term
Series (Intermediate Series) and the liabilities of Adjustable Rate Fund, if
any, will be assumed by Intermediate Series. If the proposal is approved and
implemented, each shareholder of Adjustable Rate Fund automatically would become
a shareholder of Intermediate Series.

Your Board of Directors recommends a vote FOR the reorganization proposal.
The Board believes that the investment strategies of the two Funds, while not
identical, are compatible, and that combining the two Funds may benefit
Adjustable Rate Fund's shareholders by reducing the expenses borne by that
Fund's shareholders as a percentage of net assets. The attached materials give
more information about the proposed reorganization and the two Funds.

Your vote is important no matter how many shares you own. Voting your
shares early will permit Adjustable Rate Fund to avoid costly follow-up mail and
telephone solicitation. After reviewing the attached materials, please complete,
date and sign your proxy card and mail it in the enclosed return envelope today.

Very truly yours,

RICHARD A. REDEKER
President, Prudential Adjustable Rate
Securities Fund, Inc.